Dear TIC Owners, You Just Got Royally Screwed

Update June 13, 2013: I just received a copy of the legislation as amended at the June 11 meeting. I’ll be reading it and making some more posts to flesh out my thoughts in the coming day or two. Thanks for your patience, everyone!

The San Francisco Board of Supervisors voted to approve condo lottery bypass legislation, and you’d think that would be a wonderful thing for TIC owners. But the devil is in the details, and the details – while still murky – appear to screw anyone with aspirations of home ownership in San Francisco that doesn’t have a big pile of Google, Facebook, or Apple stock to help them with their first purchase.

Why Rent? Here's Why...

Why Rent? Here’s Why…

If you are a TIC owner that qualifies for the lottery today, you’re kinda-sorta right to be happy. In exchange for a $20,000 extortion fee per unit, the city will gently shield its eyes with your big fat check and look away while you submit all your paperwork to the city so your building can become a condominium. The congratulations comes with a big fat asterisk, though: tenant’s rights activists just did a pretty good job of screwing almost every TIC owner going forward.

I have nothing against tenants – I’ve been one myself, and I assure you I could share some crazy *** landlord stories with you. But what happened tonight is pretty much a nightmare for owners of TIC units. Why?

  • The Board of Supervisors did not create any “new” lottery spaces for TIC conversion. Instead, they just destroyed the already awful lottery system and replaced it with requirements that appear to double occupancy requirements and make it almost impossible to convert five and six unit buildings to condominiums in the future. If you just bought a TIC in a 3 unit building, I hope you didn’t want to convert it to condo. Because three snowballs in hell have a better chance of becoming a snow-person than you now have of converting your TIC to a condo. 
  • The Board of Supervisors also destroyed an owner’s guaranteed right of conversion because under the new law anyone – yes anyone –  can now challenge a condo conversion for any reason at all. As I understand it, there are absolutely no guidelines or criteria that DPW must use when deciding to disallow a condo conversion. Does your building meet all of the requirements? Doesn’t matter anymore – regardless of whether or not the building satisfies all of the “requirements” –  one bitter person with some spare time on their hands can end your conversion dreams.

*sigh*

This, my dear readers, is why we have steered our buyers as far away from almost all tenancies-in-common for as long as we’ve been in real estate. The odds have always been stacked against TIC owners, and legislation like this is what passes as “progress” in San Francisco.

Board of Supervisors Ready to Hasten End of SF’s Middle Class

According to a blog post over at the city insider blog, tenant’s rights activists have teamed up with the Board of Supervisors to hasten the demise of San Francisco’s struggling middle class. In specific, amendments have been introduced to the condo bypass legislation that would essentially kill TICs as a viable form of ownership for all but the most well-off SF residents with aspirations to own property in the city.

bos

In particular, Supervisors David Chiu and Norman Yee introduced an amendment that essentially guts the condo conversion lottery going forward, eliminates the ability of five and six unit buildings to condo convert (ever), and increases the occupancy requirements for conversion in 3 and 4 unit buildings.

While I haven’t seen the amendment myself, based on what I’ve read it is a horrible idea that will hasten the end of the middle class in San Francisco. Here’s why:

  • The legislation, as written, already extorts $20,000 per unit (not building) from each owner as a bribe to allow them to bypass the condo lottery. 
  • The amendment proposed will essentially forward-load the lottery, with every building being allowed to convert now taking away the ability of a future building to convert. For example, if 3,200 units took advantage of the legislation (if adopted with the proposed amendment), then for the next 16 years there would be ZERO SPOTS in the lottery for any other units to convert. Why? Because the lottery is currently limited to 200 units/year (not buildings), and for every unit that pays the $20,000 extortion fee, a spot is eliminated in a future lottery. How many spots will be eliminated from future lotteries? Exactly the same number as units that are able to take advantage of the condo bypass.

The Board of Supervisors, and David Chiu and Norman Yee in particular, should be ashamed of this legislation. Home ownership for middle class families and rental properties for middle class families should never be an “either/or” proposition. The Board of Supervisors have pitted property owners against tenants, as though both communities can’t exist together.

If San Francisco has sensible growth and land-use policies, then the Board of Supervisors would never be in this position, and one group wouldn’t have to lose for the other to “win.”

The legislation, if adopted with the proposed amendments, is just one more loud and clear signal that the Board of Supervisors wants middle class families to leave the city for cities and neighborhoods where home ownership isn’t vilified and parents will actually know with some certainty what school their child will attend.

 

TIC Lottery Bypass Legislation is a Win/Win for SF

I’ve written about the proposed condo bypass legislation before, but Randy Shaw at beyondchron is at it again, flogging his specious falsehood that approval of the condo bypass legislation would KILL JOBS!

Let’s get something out of the way up-front: I don’t believe that people who can’t afford to own a home are lazy, bad people who deserve to be evicted and forced to live in the backseat of their cars or underneath the bushes of our public parks. When I moved to SF, I was a renter. I can tell you some crazy stories about my landlord and rental experiences. I’ll also be honest: I’m fortunate enough that thanks to a variety of circumstances I was able to afford a home in San Francisco. Again, though, here’s the important thing: tenants are not bad people, and I’m not going to spend time calling them names or describing them in an offensive manner that does nothing to help the public dialog about SF housing. I wish Randy Shaw and his editors at beyondchron felt the same, but since he can’t find honest facts to support his hysteria, he instead relies on the time-worn tradition of name calling.

In just the first three paragraphs, homeowners are vilified as “real estate speculators,” a “small segment of the real estate community” and  a “small constituency with money” – if his divisive language doesn’t turn you off, you can read on to find out that homeowners can’t be progressives but are instead the “Ayn Rand crowd” and “the city’s most Paul Ryan-like constituency.” Seriously?

Name calling aside, the gist of his argument seems to be:

  1. Mayor Lee is the consensus Mayor, who would never ever offer legislation like this, and…
  2. We have brand new supervisors who haven’t had a chance to form opinions or talk to voters about housing policy in the city, but really…
  3. Condo conversions would kill jobs because….
  4. San Francisco would suddenly have too much housing supply to make other development financially attractive…

These arguments are so factually weak that you can almost understand why he resorts to name-calling instead of constructive dialog. Let’s look at them:

1) Domestic Abuser Mirkarimi is just one example of a situation in which Mayor Lee was willing to lead, even when it wasn’t politically popular. While his tenure as Mayor may show him to be more consensus oriented, he’s been willing to take principled stands for what is right when the situation called for it.

2) Housing policy isn’t something new to the political debate in San Francisco. It’s been debated and discussed almost ad nauseum for decades in San Francisco. I have a hard time believing that a recently elected politician hasn’t already been in dialogue with his or her constituents about housing policy. Furthermore, the condo bypass legislation was available in draft form for months before the election, so it’s not like some crazy-policy-from-outer-space just landed in San Francisco. More time is not needed for everyone to get familiar with the proposed condo bypass legislation.

And finally, items three and four: condo bypass legislation will kill jobs and destroy the market for new homes in San Francisco! This argument is so specious that I’m almost embarrassed for Mr. Shaw. It is predicated on false assumptions and ignores the facts behind San Francisco housing demand and supply.

Tenancy-in-Common owners are homeowners, not speculators
A large portion of the people living in TICs will remain in them as condos.  Mr. Shaw’s argument rests on his presumption that immediately upon completion of condo conversion, the owner of every single newly converted condo would immediately sell their home. Common sense (and any level of personal knowledge of tenancy-in-common owners as part of the San Francisco community instead of a divisive stereotype relegating them all to Ayn-Rand-Paul-Ryan-Loving-Really-Rich-Speculators) says that the owner occupants of TICs that become condos are not all going to immediately sell. However, if we want to rely on something more common sense, we can look at the stats.

Tenancy-in-Common owners invested in San Francisco because they didn’t want to leave
A search of the MLS reveals that in 2012, there were about 22 sales of condos that were newly converted from tenancies-in-common. Given that 200 units are allowed to convert per year (not including fully owner occupied 2 unit buildings with a clean eviction history that can bypass the lottery), this suggests that only 10% of newly converted homes would be sold. TIC groups started forming when “entry-level” buyers in SF got priced out of the single family and condo market. It was a (relatively) affordable way for someone to take advantage of the benefits of home ownership (tax deductions, build equity) without having to leave the city. Does it make sense that people who chose the most challenging form of home ownership are suddenly going to flee the city, when they chose to buy a TIC because it was the only realistic way for them to remain in San Francisco?

Condo Conversion Would Lower Mortgage Payments for Many
The benefits to homeowners who convert from TIC to condo financing (which can only happen when the property converts from a TIC to a condo) are that they are no longer jointly liable for a shared mortgage (old-school TIC financing) or for a shared property tax bill (which still exists even with fractional financing). Furthermore, they are all immediate beneficiaries of the incredibly low interest rates that are available to condo owners but aren’t available to tenancy-in-common owners on a group loan (jumbo financing, few lenders, thus higher rates) or fractional financing (boutique financing offered by a few local lenders with higher rates and more restrictive terms).  The homes that remain owner-occupied will be occupied by people who have more disposable income and more security in their homes.  Would the SF economy benefit from a few thousand homeowners who were able to refinance into a mortgage that gave them more disposable income every month? I’d say Yes! Would that kill jobs? I’d say absolutely not! 

San Francisco has Far More Demand for Housing than Supply
San Francisco has a general plan, one part of which is the Housing Element. One part of the document is the Housing Element: Data Needs and Analysis (pdf file) that lays out background data about housing availability, supply, and anticipated demand. It’s a meaty document that was published in 2009, and while the entire document is worth a read, for our discussion I want to highlight a few numbers to show how demand for San Francisco housing far outstrips supply. Case in point:

Accounting for new production, demolitions, and alterations, the City has seen a net increase of over 18,960 housing units – an annual average of almost 2,010 units – in the last nine years [2000 - 2008]. In comparison, a net total of 9,640 housing  units were added between 1990 and 1999 or an annual rate of about 964 units per year. (Page 1.26, Housing Element: Data Needs and Analysis)

From 2000 – 2008, the city added about 2,010 homes per year. It wasn’t enough, even though it was almost double housing creation in the 1990s, which averaged just 964 homes per year!

SF Housing Supply vs Demand

So we’ve got a twenty year track record of producing – at most – 2,010 homes per year. How does that compare to what we should be building to meet demand?

The Association of Bay Area Governments (ABAG), in coordination with the California State  Department of Housing and Community Development (HCD), determine the Bay Area’s regional housing need based on regional trends, projected job growth and existing needs. San  Francisco’s fair share of the regional housing need for January 2007 through June 2014 was calculated as 31,190 units, or about 4,160 units per year. (Page 1.41, Housing Element: Data Needs and Analysis)

Yes, you got that right – according to the SF Planning Department, based on factual research, SF would need to build 4,160 homes per year to meet anticipated demand from 2007 – 2014.

The Condo Conversion Process Creates Jobs & Revenue
The process of condo conversion itself creates jobs for surveyors, construction tradespeople, and attorneys (well, maybe I shouldn’t mention this one) to name just a few. Having personally been through a condo conversion, I can tell you that it is a lot more than just submitting some forms to the planning and building departments. Condo conversions require a professional survey and the appraisal of all the homes in the building that want to refinance into a new mortgage. Condo conversion also requires that the owners correct any items noted by the city during one of three inspections required by condo conversion: a general building inspection, a plumbing inspection, and an electrical inspection. As you can see condo conversion itself creates jobs for plenty of local small businesses.

The condo lottery bypass legislation itself is filled with revenue generating fees that are estimated to create almost $30 million dollars in revenue:

  • $20 million in bypass fees would go to affordable housing
  • $6 million in processing fees for the city’s planning department
  • $2 million in mandated repairs and upgrades for TICs to comply with condo conversion requirements

And for those roughly 10% of newly converted condos that would sell soon after conversion, the city would get additional income from the real estate transfer taxes collected, not to mention that the newly sold homes would be re-assessed at current market value, adding to the city’s annual income from property taxes for years to come.

Dispute Resolution: TIC vs Condo

Resolving a heated argument with a TIC neighbor is completely different than if you and your neighbor lived in a condo. This might sound like the most non-sensical sentence I’ve written in quite a while, but it is absolutely true. Here’s why: common interest developments (CIDs) are subject to and controlled by the Davis-Stirling Common Interest Development Act (California Civil Code Sections 1350 et seq.) while tenancies-in-common are not! 

Tenancies-in-common do not meet the definition of a common interest development (section 1351 of the civil code contains the definitions), therefore the Davis-Stirling act does not apply. Let’s take one particular example to show you the difference in how things could play out in a hypothetical dispute – one set in a fictional TIC, the other a condo.

TIC Dispute & Resolution:
Let’s say that you live in a four-unit TIC and that one of your neighbors does a major remodeled. Down to the studs, absolutely gorgeous, must of cost a ton of money! In fact, it did cost a ton of money… so much money that your neighbor can’t afford to pay his contractor. So the contractor files a lien – but the contractor can’t file a lien against their unit (it isn’t a separate legal parcel), so they file a lien against the entire building… which includes you. So even though you have a fractional mortgage, even though you don’t get any of the benefit of the remodel, and even though you’ve never met this contractor, you are now involved in your neighbor’s dispute because you live in a TIC. And how the dispute gets resolved depends purely on contract law and how everyone interprets the TIC agreement. Because everyone did sign the TIC agreement, right?

Condo Dispute & Resolution:
In a condominium, the above situation could never happen. Why? Because Section 1369 of the CA civil code expressly prohibits a contractor from filing a lien against anyone other than the legal owner of the subject condominium where the work was performed. They can’t file a lien against the neighbors, they can’t file a lien against the HOA, they can’t file a lien against you. Their sole recourse is against the owner of the condominium.

This is just one example of how dispute resolution in a condo differs dramatically from dispute resolution in a tenancy-in-common (TIC). It’s something that many people don’t think about during the purchase process, because who wants to go pick out their dream home while imagining worst-case neighbor scenarios? My experience is that people tend to give others the benefit of the doubt, and very few buyers go into condos or TICs with the assumption that their neighbors are all losers that are going to make their life a living hell.

BIG FAT ENORMOUS DISCLAIMER:

1) I am not an attorney and am not qualified to give legal advice. This article is not legal advice. It is an illustration of how dispute resolution varies based on your form of ownership, which is something to consider when deciding what type of property to purchase.

2) Your specific situation, TIC agreement, or other document may vary wildly from the hypothetical scenario I’ve written about above. If you are reading this because you are in a dispute with a neighbor, I want to remind you that this isn’t legal advice and I’m not an attorney.

3) You should never, ever take candy from strangers (except on Halloween), and you should never rely on free advice you find on the internet. Just saying.

 

 

Lottery Bypass – Condo Conversion Update

Tenancy in Common lottery bypass legislation was proposed several months ago, so I wanted to take a moment and update you on where the legislation stands and why supporting it is so incredibly important.

A row of homes on 17th St. in San Francisco.

For those of you that are so inclined, you can read the draft legislation (pdf file). Here’s a summary of important points about the TIC lottery bypass that is being proposed:

  1. It does not increase tenant evictions- tenants that want to continue to rent their home in a building that converts through the proposed legislation will receive incredibly generous leases. The way the legislation is currently written with is as follows:”No subdivider or subsequent condominium unit owner shall refuse to renew a lease or extend a rental agreement to any non purchasing tenant as of the date the building makes the fee payment pursuant to Section (c) above. Any extended leases or rental agreements made pursuant hereto shall expire only upon the death or demise of such tenant or the last surviving member of the tenant’s household, provided such surviving member is related to the tenant by blood, marriage, or domestic partnership, and is aged 62 or older at the time of death or demise of such tenant, or at such time as the tenant voluntarily vacates the unit after giving due notice of such intent to vacate. Each lease shall contain a provision allowing the tenant to terminate the lease and vacate the unit upon 30 days’ notice.
  2. It raises a lot of money for the city in a tough fiscal environment-”The fee amount is $20,000.00 per unit. Said fee is reduced for each year the building has participated in the condominium conversion lottery up to and including the 2012 lottery in accordance with the following formula:
    (1) 2 years of participation, 20% fee reduction per unit;
    (2) 3 years of participation, 40% fee reduction per unit;
    (3) 4 years of participation, 60% fee reduction per unit; and
    (4) 5 or more years of participation, 80% fee reduction per unit
  3. It does not change eligibility requirements – Building that were already excluded from the lottery or condo eligibility because of a building eviction history or other factors that might exclude a building still apply. This is by no means a “collect $200 as you pass go and condo convert” opportunity. It is expensive, and it is only open to buildings that have already been in and qualify for the lottery!

What Happens Next?
The fill-the-city-coffers-with-condo-conversion-fees legislation has been assigned to the Land Use Committee of the Board of Supervisors.  The three-person committee will vote on whether or not to approve the legislation and send it to the Board of Supervisors – you can find agendas and meeting minutes for the committee here.  The bill can die in committee, but if it does make it to the Board, then it will need 6 votes (out of the 11 supervisors) to make it to the Mayor’s desk.  Mayor Lee has been very quiet about whether or not he will sign it.

What Can You Do? 

  • Get Involved – The good folks at Plan C have been working hard to help supervisors understand how important passing this legislation is.
  • Contact your Supervisor and express your support for the “one time lottery bypass condo legislation.” Give them a call. Then an email. And a real old-fashioned letter too!
  • Share your story with us! We’d very much like to put a human face on this legislation, so please share your story about how being able to buy a TIC has kept you in the city, or how the ability to condo convert will impact your decision to remain in San Francisco or leave the city. We’d be happy to come out and make a video, take a photo of your building, or otherwise help you in putting a very human face on the middle-class dreamers and do-ers that will be most impacted by this bill.