After a contentious legislative process where the original sponsors withdrew their support for the ordinance and the Mayor did not sign it, on June 18, 2013, the San Francisco Board of Supervisors passed an ordinance establishing the Expedited Conversion Program (“Program”). The Program was promoted to alleviate the huge backlog for conversion of Tenancy in Common (“TIC”) units to condominiums stemming from the existing condo conversion lottery system, which limits conversions to 200 units per year. The ordinance goes into effect July 28, 2013, and will permit hundreds of TIC owners to convert their units to condominiums, in exchange for payment of an “impact fee” of $20,000 per unit (although this may be reduced) in addition to the condo conversion application fee of over $9,600 per building.
Of course, this is San Francisco… and the ordinance includes trade-offs for offering so many TIC owners the privilege to convert to condos under the Program. The trade-offs include: (i) existing tenants living in a converted unit must be offered a lifetime lease, (ii) more stringent tenant eviction limitations that could restrict the ability to convert, (iii) increased owner-occupancy rules requiring owners to continually occupy their units for lengthy periods of time, and (iv) perhaps most controversial, a “poison pill” provision that will suspend many condo conversions in the event anyone files a legal challenge to the ordinance (subject to exceptions).
TIC conversion to condos under the Program will occur in phases over the next several years. Certain buildings will be eligible to convert immediately, while other buildings will become eligible in April of each year from 2014 through 2019. TIC buildings that participated unsuccessfully in the 2012 or 2013 lotteries are the primary beneficiaries under the Program, and will be eligible to convert to condos under the Program either (a) immediately (if owner-occupancy requirements met for 5 years as of 4/15/13), or (b) beginning on 4/15/14 (if owner-occupancy requirements met for 3 years as of 4/15/14).
Other “Additionally Qualified Buildings” under the Program include those that did not participate in the 2012 or 2013 lotteries, but had a signed TIC agreement in place as of 4/15/13. These buildings may become eligible for conversion in April of each year, beginning in 2014 and ending in 2019, with the order of eligibility depending on when the buildings meet the required owner-occupancy periods. For example, a TIC building may apply for conversion under the Program beginning on 4/15/15 if the required number of owners continuously occupied their units for six years (from 4/15/09 to 4/15/15). The following year, a TIC building may apply for conversion under the Program beginning on 4/15/16 if the required number of owners continuously occupied their units for six years (from 4/15/10 to 4/15/16). And so forth until April 2019.
Future TIC owners and existing buildings that did not have a signed TIC agreement in place as of April 15, 2013 bear the brunt of the ordinance, and will be negatively impacted. These buildings must wait until the condo lottery resumes, ten or more years from now, before becoming eligible to convert. When the lottery does resume it will do so with much more restrictive owner-occupancy requirements and tenant eviction rules. Conversions under the condo lottery will generally be limited to 2-4 unit buildings, with 5-6 unit buildings being eligible to convert only in very limited circumstances.
While the Program provides a path to condo conversion for many TIC owners, the devil may be in the details. Those interested in the Program should understand the significant trade-offs contained in the ordinance. In particular, the real possibility that a building’s condo conversion application may be suspended midway through the process pending the outcome of a lawsuit challenging the ordinance. Owners must decide whether they can live with this risk and associated expenses, when their condo conversion could be held up for years, or potentially canceled, depending on the outcome of such a lawsuit.
Please note that the above is only a brief summary of the main points of the Program, and is not a complete description of all applicable rules. Owner-occupancy standards may vary for 2-4 unit and 5-6 unit buildings. The eviction history of a building may restrict or completely disqualify a building from converting to condos. Various deadlines for payment of fees and submittal of applications apply. All condo conversions must meet the applicable requirements of Article 9 of the San Francisco Subdivision Code and the San Francisco Department of Public Works, the lead City agency for processing of condo conversion applications.
A copy of the ordinance is available at the following link: http://www.sfbos.org/ftp/uploadedfiles/bdsupvrs/ordinances13/o0117-13.pdf
Special thanks to law clerk Andrew Guess, who contributed significantly to this update.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.