Condominium Conversion in San Francisco

In the City and County of San Francisco only 2-6 unit properties may convert. They qualify only when they (i) meet occupancy requirements, (ii) win or bypass the conversion lottery, and (iii) for lottery conversions, satisfy “tenant rights” rules.

Lottery Conversions

Owner Occupancy Requirements

For 2-4 unit lottery winners, one unit must be owner-occupied for three years; for 5-6 unit lottery winners, three units must be owner-occupied for three years. The occupant can be a tenant for three years so long as he/she is an owner at the time of application. Occupancy is proven by sworn statement and the three year period is measured backwards from the lottery entry deadline. For example for a building to qualify for the 2010 Lottery (the actual date of which is to be determined but assuming 2/1/10), the qualifying owner occupants must have resided in the property since at least 2/1/07. Conversion requires that the same owner-occupant(s) (one for 2-4 unit buildings, three for 5-6 unit buildings) reside in the property continuously from three years before the lottery entry deadline and until the conversion application is submitted. The identity of the qualifying owner-occupants cannot change during those years.  San Francisco Department of Public Works has issued a policy statement requiring that in order to maintain lottery priority the qualifying owner-occupants must remain consistent during each of the previous lottery losses.

Lottery Process

The condominium lottery is held annually during the first quarter of the calendar year and tickets for the lottery go on sale generally in mid-November of the previous calendar year. Up to 200 units, not 200 buildings may be converted via the lottery each year. The lottery system is designed to favor buildings that have previously lost. Theoretically chances of winning will increase each time a building enters the lottery, but the goal had been undermined in recent years due to the rise in the number of buildings entering the lottery. A system was adopted commencing with the 2006 condo lottery attempting to guarantee that those who continued to enter the conversion lottery would eventually win.

Under the current system, the first 100 winning units are selected from among applicant buildings which have lost the lottery at least three times (“Pool A”). Buildings are not eligible to participate in Pool A unless the owners can swear that no elderly (over 60 who has resided in the building for 10 years), disabled or catastrophically ill person was evicted from the building since January 1, 2000. Eligible buildings are grouped according to the number of years they have entered. If the number of apartments in the most senior Class is less than 100, all of the buildings in that Class will automatically qualify for conversion. The unused Pool A places are then available for the next most senior Class.

Buildings that do not qualify for, or are unsuccessful in, Pool A are eligible to participate in “Pool B” from which the remaining 100 units will be selected for conversion. Each Pool B entrant gets a number of tickets equal to the number of times it has participated in the condominium lottery. Buildings from which an elderly, disabled or catastrophically ill tenant was evicted after November 16, 2004 are eligible for only 25 of the spaces in Pool B.

The Pool A/Pool B system has produced fairer results for repeated entrants than the prior one, but overall the chances of winning are poor and diminishing from year to year. In 2007 all of the sixth-time entrants were automatically selected (there were no buildings in for the seventh or more time class), but in 2008 sixth-time entrants had a statistical likelihood of 92.05%. The statistics for 2009 are not yet available, but of the 200 units selected, 161 were eligible for Pool A status (i.e. entered at least three times previous to 2009) and the remaining 38 units were Pool B entrants.

After the 200 units have been selected an additional 20 buildings are picked at the time of the lottery to go on a standby list in case winners fail to submit applications or are rejected for failure to qualify.

There are circumstances in which a building is ineligible for conversion to condominiums. A May 2005 law provides: (1) A building from which one elderly (60) tenant in occupancy 10 years or more, or one disabled tenant, has been evicted since 5/1/05 for any reason unrelated to the tenant’s behavior, can never be converted; and (2) A building from which two or more tenants (regardless of age or disability) have been evicted from separate units for any reason unrelated to the tenants’ behavior since 5/1/05 can be converted only after 10 years of owner-occupancy. These restrictions will not apply to a building if each unit was occupied by a separate owner on 4/4/06. The conversion restrictions apply without regard to whether the current owner initiated or otherwise participated in the evictions. “Eviction” is defined to mean the issuance of a notice terminating tenancy even if the tenant later leaves without further legal action (or in exchange for a “tenant buyout”). However, if a property owner issues then withdraws the eviction notice prior to its expiration and the tenant receiving the notice remains in tenancy for at least 120 days following the expiration of the notice, the action would not deemed to be an “eviction”.

Tenant Intent to Purchase Requirements

Lottery winners must submit “tenant intent to purchase” forms signed by residents, renters or owner-occupants, 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. Under this system, only 3-4 unit buildings with a solitary owner-occupant need renter cooperation to satisfy the requirement.

Tenant Rights Rules

All renters (including those who do not sign a “tenant intent to purchase” form) get an opportunity to purchase after conversion at a price established by the owner. 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. All tenants must be notified of their rights before a lottery conversion application is filed.

Lottery Bypass

There are certain buildings which can bypass the lottery and commence the application process for conversion to condominiums. Two unit buildings with a clean eviction history bypass the conversion lottery if both units are occupied for a minimum of twelve months by separate (unmarried) individuals each with at least a 25% ownership interest in the property during the entire occupancy period. This exemption also applies to mixed use buildings having no more than two residential units, both of which are owner occupied. Occupancy is proven by sworn statement and evidence the property qualifies for the Homeowners Exemption for property tax purposes. A two-unit building cannot bypass the lottery if an elderly (over 60 who has resided in the building for 10 years), disabled or catastrophically ill person was evicted from the building after November 16, 2004.

Requirements of Conversion

All applicants for condominium conversion, whether via 2 unit bypass or lottery winner, are required to pay the associated fee and obtain an inspection for condominium conversion from the Department of Building Inspection. Once a City inspection is requested the cited work must be completed whether or not the conversion is pursued. Inspection reports typically address: (i) work completed without required permits, (ii) conditions which present safety hazards, and (iii) energy and water conservation violations. It is not a prerequisite to conversion that buildings need not meet current building codes, be seismically upgraded, or have parking. In cases where a significant amount of work is suspected, a pre-inspection by a private consultant familiar with conversion requirements may be beneficial to determine potential costs.

Application Process

Owners of qualifying buildings (either lottery winners or lottery bypassers) submit an application package to the City. The major components of the package are: (i) the receipt for the inspection fee paid to DBI (you need not have had your inspection in order to submit the conversion application); (ii) a survey or “condominium map” prepared by a licensed surveyor; (iii) a sworn statement of occupancy and evidence of a homeowner’s property tax exemption; (iv) title report; and (v) 3 R (report of residential record).

Of the foregoing, the 3R has some significance and it is wise to review in advance. When a property is sold the seller provides the 3 R as part of the disclosure package. This report reflects the status of certain permit history for the property, the zoning and the occupancy status of the building as known by the Department of Building Inspection. If there is an inconsistency between the occupancy status of the building on the 3R vs. the reality it may present an issue for processing of the application including potentially disqualifying a property. For example if the property appears to be 3 units, but the 3R shows the occupancy as “unknown” or the 3R reads “two family dwelling” the discrepancy must be resolved in order for the application to be accepted. In order to avoid undue delays it is advisable to review the 3R early in the process (i.e. at time of application for the lottery or prior to submittal for a bypass application) to identify any potential issues and resolve or be prepared to demonstrate to the City how the discrepancies will be resolved in a timely manner.

The package must also include a variety of other items which an attorney can help you compile.

After submittal of the application, the processing time depends upon a variety of factors including the timing of the inspection, and completion of work cited in the inspection. There is an additional time component for 5-6 unit buildings due to the additional City approvals and a State approval which generally adds an additional four months to the process. Working with a professional who has knowledge of the process and the City departments combined with the ability to focus on the application can accelerate the approval.

All condominiums must have governing documents consisting of CC&Rs which describe the rights and duties of the owners. CC&Rs should be prepared by an attorney. Properties of 5-6 units must also obtain a “Final Subdivision Public Report” from the California Department of Real Estate by submitting a separate application which also requires a formal budget.

After an application is approved, the survey must have notarized signatures from all recorded owners and, in the case of 5-6 unit buildings, all lenders. It is then returned to the City with an updated title report, a certificate of completion of the inspection work, and a Tax Certificate showing property taxes are paid current. NOTE: the lien date for property tax purposes is January 1st of each year, therefore, if a map is to be recorded on or after January 1st the property taxes for the following year are due in full prior to recordation. Owners should budget accordingly when commencing the application process. The building officially becomes condominiums when the survey and CC&Rs are recorded.

SFDPW no longer requires the consent of a property’s existing mortgage lenders in order to allow a 2-4 unit property to be converted to condominiums. Although the new policy will allow most owners with non-compliant lenders to complete their conversion, California law requires that lenders sign the “condominium plan” (an attachment to the CC&Rs which shows the spaces included within each condominium) as a condition of condominium formation. Therefore, owners of 2-4 unit properties without lender consent will not be able to record their CC&Rs until they are ready to sell or refinance the condominiums. As a result, where the pre-existing lender has not signed the condominium plan, title companies will require that funds from replacement loans (either refinance loans or purchase loans) be in an escrow account with the title company before the CC&Rs and condominium plan can be recorded. This requirement will impose only a minor inconvenience on condo converting owners because there is no reason to record the CC&Rs and condominium plan until the owners are ready to sell or refinance. NOTE: buildings containing more than four units continue to need to obtain lender signature on their condominium maps.

Final recordation of the map with the City does not alter the ownership or financing of the property. The condominiums in the building remain owned by the same individual or group, and all remain subject to the same mortgage. Separation of the condominiums so that particular owners have title to particular units generally requires refinancing with separate mortgages for each unit.

Costs of Conversion (as of 07/31/09)
Cost Item	2-4 Unit	5-6 Unit
City Application/Map Review	$9,036	$9,036
3R Report	$160	$160
Survey and Mailing (varies w/building size)	$7,000	$9,000
Budget Preparer	$0	$4,000
State Application	$0	$1,700
Miscellaneous Expenses	$150	$300
City Inspection	$2300	$2700

Typical attorney services include preparation of the City Application, monitoring/troubleshooting, advice on space assignment, CC&Rs, and assistance in lender signing and recordation. Building permit fees and repair costs depend on the extent of needed work. Most title companies will provide required title reports free of charge if the owner promises to use the same company for a post-conversion sale or refinance of the property. Lender charges to sign the survey range upwards from $750.

Property Taxes

The current property tax assessed value will be allocated among the condominiums according to the agreed upon allocation pre-conversion, and each condominium will get a separate tax bill. For multiple owners the burden is on the owners to advise the Assessor as to the appropriate allocation. For example, for a four unit property owned by four individuals each having 25% on title, their individual property taxes should be based not upon the 25% ownership, but their actual purchase prices after adjustment for cost of living increases and improvements triggering reassessment. Property taxes do not increase as a result of condominium conversion; the prior tax basis pre-conversion remains with the property (assuming no change in ownership).

Insurance Costs

Conversion often increases insurance costs, particularly in 3-6 unit buildings, and may require changing insurance carriers. Reviewing insurance with the insurance agent early in the conversion process will allow planning and budgeting once the conversion is complete.