May 31st, 2011
Plan to Let TICs Automatically Become Condos Gets Floated at City Hall
Once again, a plan to let all TICs automatically become condominiums has been floated at City Hall—a plan which will increase evictions, increase condominium conversions and deplete the rental housing stock causing rents to increase.
The plan—similar to previous ones floated by Newsom, and before him Sups. Alioto-Pier and Dufty—would let some 2,000 “tenancies in common” (TICs) automatically become condominiums by paying a “fee” of between $15,000-$30,000 per unit. These TICs are like condominiums (and were treated & regulated as condominiums until a 1980s court decision) but exempt from the city’s condominium conversion law, which limits the number of condo conversions to 200 per year, prohibits the eviction of senior or disabled renters, and gives renters the first right to buy their unit. Thus TIC conversions are unlimited and unregulated and have become the preferred way for real estate speculators to convert rental units into condominium-type units. But, while the conversion is quick and dirty (evict the tenants and sell the units is all that’s needed to be done), the resulting TIC is not as valuable as a condominium and is a riskier form of ownership (TIC owners own the building jointly, sharing liability and the moorage). Thus nearly every TIC eventually becomes a condominium but with over 1,000 TICs converted each year and the city’s condo law allowing just 200 condo conversions each year, there’s thousands of TICs waiting in line to become condominiums. And they’re all complaining (or all but 200 each year) how unfair it is that they can’t become condominiums when they want to. Which is rather ironic and sad since they created these TICs in the first place so they could get around the condo conversion law (and the pesky tenant protections) but now feel entitled to get the value of security of the condominium which the condo conversion law lets you get.
Beside the outrage of rewarding someone for circumventing a city law and evicting people, what’s the problem? Many, not the least of which is that these 2,000 units of housing would be removed from rent control, since state law prohibits rent control on condominiums and since these units bounce back and forth between owner occupied and rental this would be a big dent in the city’s rent control housing stock.
But an equally big problem is that this proposal will mean more TIC conversions (and Ellis evictions) in the future. Right now the main deterrent to TIC conversions is that it’s difficult for TICs to eventually becomes condominiums (which they need to do eventually). Having thousands of TICs clogged up at the condo conversion gateway is a good thing for tenants: the more difficult it is to convert to a TIC, the fewer TIC conversions there will be in the future and that mean fewer evictions and more rental housing. Making it easy to turn TICs into condos means simply more conversions, more evictions and higher rents as the rental housing stock gets depleted. Letting the thousands of TICs waiting to become condos instantly convert will set a precedent and send the message to real estate speculators that whenever the condo conversion gateway gets clogged up then the city will simply let all the TICs instantly become condos.
And it’s a bad deal for the city financially and tantamount to a giveaway to real estate investors and speculators. The city seeks to collect $30,000 per unit but the benefit to the TIC owner is five times that. An average 2 bedroom TIC is valued at about $750,000; it’s value as a condo, though, is 20-30% above that so letting a TIC become a condo increases the value of that building by at least $150,000. The investor thus pays the city $30,000 and makes $120,000 profit (which they undoubtedly will use to buy another building, evict the tenants and convert that to a TIC anticipating the city will give them another $120,000 gift in a few years…).
All that said, the proposal this year is a bit different: Mayor Ed Lee has offered to discuss the proposal with tenants and indicated he would be willing to look at some long term solutions to the problem of unregulated and unlimited TIC conversions. If that’s the case, then scenarios exist where tenants could benefit in the long run by letting existing TICs (units which are mostly lost anyway, though some do bounce back into rental) become condos if it means that in the future we will see fewer conversions of buildings where tenants are living (after all, as noted above the number one reason right now not to open the floodgates is it would mean more conversions in the future). Thus structural and permanent reform of future conversions could warrant letting these TICs become condos, but only if that future reform is significant and effective.
Some ideas which might make it worthwhile:
(1) Ban Condo Conversions Entirely–TIC conversions have rendered the city’s condo conversion law a joke. Right now all the tenant protections in the law are meaningless and the law exists only to let TICs increase their value. There’s no legal right which property owners have to a condo, it’s strictly discretionary as to whether or not the city allows any condo conversions. We have TIC conversions so we have no need for condo conversions at all.
(2) Ban TICs From Becoming Condos–It really is annoying that people are allowed to subvert the condo law and escape all the tenant protections but then are allowed to come back in and get the value of a condo. People can have 2 choices: Follow the condo conversion law and you’ll get the financial benefit of a condo or Do the quick and dirty TIC conversion and avoid all the tenant protections–but don;t expect to come back seeking the financial benefit of a condo.
(3) Stricter Limits on Condo Conversions–Right now, only 2-6 unit buildings can be converted to condos; 2 unit buildings with both units owner-occupied for just a year can convert without being subject to the 200 unit annual cap, while the rest are subject to the cap. Redefining what buildings can covert and which ones go through the lottery could effectively restrict condo conversions enough that future TIC conversions would diminish. For example, the buildings eligible for conversions could be limited to buildings with 3 units or less with all 2 unit buildings having to go through the lottery. Not only would this reduce the number of condo conversions each year, it would diminish the role of real estate speculators who make their highest profits off the 4-6 unit buildings.
(4) Amend State Law To Enable Regulating TICs As Condominiums–The ideal solution is to regulate TICs as condominiums as was the original intention of San Francisco’s condo conversion law, This would require state legislation to vacate the 1980s court decision which said they were not condominiums.
(5) Keep 200 Condo Conversions Annually, But Make Them All Limited Equity–This would surely separate the real estate speculators and investors from homeowners. TICs would be able to convert to condo, but only as a limited equity condominium, meaning its value could only increase commensurate with inflation. This would provide more stable ownership than a TIC and the condominium would remain affordable for new home buyer sin the future. Real estate speculators won’t get anything from this, though, which would be good.