SF blocks condo expansion

JULY 14, 2010


San Francisco’s condominium lottery attempts to protect tenants from eviction,  but it continues to discourage home ownership through delay and bureaucratic inefficiency — something evidenced by the city’s latest attempt to allow more residents to become condo owners.

A tenancy-in-common allows various people to purchase a percentage of a property, or a unit, ultimately sharing the entire property with other owners. As certain shareowners gain more revenue, they may desire to purchase their percentages independently by converting them into condominium units, thus becoming the sole owners of their “unit.”

The city requires every tenancy-in-common shareholder to enter a lottery before converting their share of the property into a condominium and becoming “unit owners.” The Department of Public Works only allows 200 units of three-to-six-unit buildings to convert annually.

Mayor Gavin Newsom, in an attempt to balance a potential $500 million deficit, proposed earlier this year to allow more than 2,000 TIC unit-owners to change their properties into condominiums for an increased fee, normally $9,099. The initiative could have collected approximately $8 million in revenue, while also allowing 1,799 unsuccessful lottery applicants a chance to transform their units into condominiums. The mayor’s press office did not provide a quote by deadline.

However, the budget committee of the San Francisco Board of Supervisors recently rejected the potential $8 million gain by blocking the mayor’s condominium lottery bypass proposal. Supervisors John Avalos, Sophie Maxwell and David Campos voted to table the proposal, while Supervisor Sean Elsbernd voted to recommend, with Supervisor Ross Mirkarimi excused.

Supervisor John Avalos, a member of the budget committee, told the San Francisco Examiner that the “conversion limit is intended to protect renters … An influx of conversions would increase evictions and reduce the rental stock, making it costlier for tenants who are struggling in the recession.”

San Francisco’s strict regulation of the housing market exacerbates California’s low homeownership rate. According to 2009 Census Bureau statistics, the state’s homeownership rate is 57 percent, only higher than New York state’s and the District of Columbia’s rates.

TICs have become a gateway for entry-level homeowners, as it allows them to easily purchase a percentage share of a property. Condominiums allow individuals to only purchase single units, while a homeowners association owns the rest. TICs have become increasingly popular since the implementation of the condo lottery in the early 1980s.

David R. Gellman and R. Boyd McSparran, two attorneys from the firm Goldstein, Gellman, Melbostad & Harris, LLP (G3MH), contribute the popularity to four reasons: high prices for single residency homes, rent control, which discourages investment in multi-unit buildings, restrictive numeric limits on condominium conversion of existing buildings and loose restrictions on condominium conversions that pass the numeric limit, such as duplexes.

Duplexes are allowed to bypass the lottery after city approval. This has driven up premiums for two-unit properties, says Kasey Stevens, the vice president of Klingbeil Capital Management. “Three-to-six unit buildings might sell (generally speaking) in the $300 to $500 a foot range, while a duplex will sell in the $500 to $700 a foot range.”

Some grassroots organizations and legal firms realize the hazards of the lottery because of the increasingly lengthening amount of time it takes to convert units into condominiums. Plan C, a civic organization that supports reforms related to homelessness, homeownership and public education, avidly supported Mayor Newsom’s bypass option. On its Web site, the organization wrote that the program is “sensible legislation that helps everyone — it addresses the needs of TIC owners AND provides funding to low-income residents with special housing needs… the program would help thousands of first-time homeowners, would hurt no one, and that it would help solve the City’s budget mess.”

The Department of Public Works enforces and organizes the lottery. It tries to prioritize past unsuccessful applicants by granting them multiple tickets: one for the current year, one for every unsuccessful year from 1990-1994 and one for every year from 1994 to 2009. Ted Gulickson, president of the San Francisco Tenants Union, explained to Mission Local that the lottery was “put in place because of rampant property speculation in the 1980s.”

Unfortunately, according to David Gellman of G3MH, new applicants may have to wait up to 20 years to buy their own units. “Based on available data supplied by the city, a TIC group entering the lottery for the first time within the past couple of years can look forward to a wait of over 20 years to qualify for conversion under the lottery system; and the time gets longer every year, since the number of units awarded through the lottery stays the same every year (200 units) while the number of properties entering the lottery each year continues to increase.”

For those who have to wait, the options are slim. “Obviously, either an increase in the number of units awarded through the annual lottery above 200, or some other method of freeing up conversions, such as that proposed by Mayor Newsom, will be needed. The Tenant’s Union, to which a majority of the Supervisors are beholden, will oppose any such efforts.”

San Francisco communicates a truth about the northern coast of California, as businesses and people move inland because of expensive coastal properties. “All of the regulations, in some sense, restrict the supply of land, and make it more expensive,” says Professor Thomas Means, Research Fellow at the Independent Institute and Economics Professor at San Jose State University. Means said that large firms, such as Google and Chevron, will continue to move out of coastal areas like San Francisco.

As the mayor and the board of supervisors struggle to balance the San Francisco’s budget, the government is forced to consider the practical effects of costly regulations, and whether they discourage new taxpayers from living in the city.

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