Small Residential Buildings:  To Condo or Not to Condo

Constant tinkering with the rules
poses challenges to small building owners

The San Francisco condominium conversion laws have changed in recent years and can be difficult to follow. Building owners wishing to convert must navigate through myriad rules concerning owner-occupancy requirements, tenants rights, prior-eviction issues, a complex application process, and, unless eligible for bypass, the infamous condominium conversion lottery.

The following summary of the San Francisco condominium conversion rules is provided to help small building owners and investors interested in converting understand the San Francisco condominium conversion process.

Properties Eligible for Conversion: 6 units or Less

The City counts the number of residential units on a property to determine eligibility to convert. A property may have no more than 6 residential units to qualify for conversion. The number of commercial/retail units is disregarded when calculating the unit count.

A property will be eligible to convert if it (i) meets the owner-occupancy requirements, (ii) is not prohibited by tenant eviction regulations, (iii) wins or bypasses the conversion lottery, and (iv) satisfies the “tenants rights” rules. A qualifying 2-unit 100% owner-occupied building may be eligible to bypass the conversion lottery. A 5-6 unit property also requires public notice and a hearing before the City Planning Commission.

The Unlucky: Welcome to the Lottery

The City permits a maximum of 200 units to be converted through the lottery per year. The lottery has been revised in recent years in an attempt to favor buildings that have previously lost, so a building’s chances of winning increase over time. However, the sheer number of lottery applicants means that all buildings face tough odds of winning the lottery. In 2008, there were applications for conversion of more than 1,900 units for the 200 lottery spots.

The Lucky Few: Bypass of the Lottery for 2-unit, 100% owner occupied buildings

A 2-unit building may bypass the conversion lottery if each unit has been separately occupied by a separate individual who is a record owner with at least a 25% interest in the property for at least one year prior to submittal of the conversion application to DPW/BSM. Vacant units are not considered owner-occupied for lottery bypass purposes. Tenant eviction regulations apply and may disallow a lottery bypass, in which case lottery rules for 2-unit buildings would apply.


Some of the Details: Owner-Occupancy Requirements for Any Conversion

2 Units (Lottery bypass) – See above.

2-4 Units – At least one (1) unit must have been separately occupied by a separate individual who is a record owner with at least a 10% interest in the property for at least three (3) years prior to the lottery entry deadline for that year.

5-6 Units – At least three (3) units must have been separately occupied by separate individuals who are each record owners with at least a 10% interest in the property for at least three (3) years prior to the lottery entry deadline for that year.

Tenant Eviction Regulations; Special Tenant Considerations

Under a San Francisco law passed in 2006, eviction of a protected class tenant, or multiple evictions of non-protected tenants, may restrict or even prohibit conversion for a property, depending on the facts of the evictions.

Existing tenants in a property that is converted have several rights, depending on the circumstances. Each tenant has the right to purchase the unit in which that tenant resides. Tenants not purchasing their units have the right to remain in their units for one year after the conversion. Tenants over 62 years of age are entitled to lifetime leases. Tenants who elect to vacate their unit within 120 days after the conversion are entitled to $1,000 in moving expenses.

Building Code Compliance; CC&Rs and HOA Documents

If you are allowed to convert, DBI will require that certain code work be completed before a conversion may be finalized. Note that once a conversion is complete, condominium management and HOA documents (“CC&Rs,” etc.) must be prepared for the condominium project. Properties with 5 or more units will also require approval by the California Department of Real Estate.

Our Services

In addition to working closely with City and State agencies, Reuben & Junius’ services include coordination with land surveyors, civil engineers, title companies, sales and marketing professionals and other consultants to compete condominium conversions in a timely and cost-effective manner.

Reuben & Junius’ extensive experience in condominium and subdivision practice also includes commercial condominium conversions, and new construction condominium projects of all types – residential, commercial and mixed-use throughout the San Francisco Bay Area.

This summary is by no means a complete list of all applicable regulations and controls and should not be relied upon as such. For further information, please contact Kevin Rose or Jay Drake at Reuben & Junius, LLP.

Reuben & Junius, 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 leases, purchase and sale agreements, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.