Ask Us: Can Condo Conversion Save You From Rent Control?

Where readers ask and we (the community) try to answer:

This is a doozy of a question, so put your game faces on:

Hi there,

Being fairly new at the SF real estate/landlording game, I am still discovering the fascinating mine field of Rent Control laws through the numerous websites on the subject.
At least FrontSteps.com somehow manages to make it entertaining. Maybe you can help me with a few beginner questions here.

Here is my situation :
I plan to buy a 2 unit home (both vacant) with a friend as a TIC in SF and subject to Rent Control. After occupying one unit each for a year, we hope to by-pass the lottery and go for condo conversion to own one each. Does this sound like a reasonable plan?

Question 1: During the 2-3 following years needed to complete the conversion, do both of us still need to occupy the units or can we rent one or both?

Question 2: Once converted, is it true that if we rent (to brand new tenants) we will still suffer from Rent Control (because we are the subdivisers) ?

Question 3: If so, why does everybody want to condo-convert? Is it only to make a 10-15% profit by selling the condo just after? Isn’t it to enjoy renting the place free of RC at all?
(I understand that another benefit is to get separate ownerships instead of the TIC).

Question 4: Assuming the answer to 2) is yes, is there any loophole? For instance if I live in my condo and I buy the second condo from my friend, then maybe I can rent this one exempt of RC?

question 5: If I live in the unit and rent 1 room, is it still under Rent Control?

Thanks for your help.

Let’s see what replies we can get from the readers in the comments below, and we’ll fill in the blanks just as soon as we can. It sure would be nice if David Gellman or Andy Sirkin would provide some insight (and maybe win a client as a result).

Thanks for reading and thanks for this lovely little quote, “At least FrontSteps.com somehow manages to make it entertaining.” We aim to please, and entertain, so we have to ask, “Have you nominated your sexiest Realtor today?”

8 thoughts on “Ask Us: Can Condo Conversion Save You From Rent Control?”

  1. (2) unit buildings can bypass the condo lottery if the two owners are not related and occupy for 1 year. Here’s a good flow chart.

    http://www.sfgov.org/site/uploadedfiles/sfdpw/bsm/FlowchartConversion2UnitBypass.pdf

    Here’s a good FAQ on condo conversion (which you may have read)

    http://www.sfgov.org/site/sfdpw_page.asp?id=32430

    Look very carefully at the application requirements before you close so you can get all the information you need from the seller you will need.

    http://www.sfgov.org/site/uploadedfiles/sfdpw/bsm/sfresidentialconversionapp.pdf

    My understanding of rent control is that is based on the age of the building used as a residential unit and not a method of owning title. So a residential building covered by rent control before condo conversion would still be covered by rent control after. But a commercial building that is old enough to be covered by rent control if it were residential would not be covered by rent control even if it were converted to residential after the rent control ordinance was passed. Example: My 1908 building was commercial until converted to residential condos in 2004 and should I choose to rent my unit, it would not be covered by rent control because the use change occurred after the rent control ordinance date. But really, you should consult an attorney on what you are trying to do, but don’t get your hopes up if rental is your ultimate goal.

    Didn’t answer all of your questions but offering some info…

  2. This doc has some answers to your questions, especially page 8. If this document is to be believed, it would suggest the ‘loop hole’ is for you and your friend to trade condo’s to officially be exempt from RC.

  3. Lev,

    Interesting find in that doc on page 8. It refers to the Costa-Hawkins act. Myself, I would want to speak with an attorney to make sure I met all the requirements and understand fully what I was getting into.

  4. This is basically what I know because I own a newly converted unit in a 4 unit bldg (waited 8 yrs as a TIC). A condo is a single family home, and SFH aren’t subject to rent control laws UNLESS you used the Ellis Act to take the building out of rental use, evicted tenants, and then converted it to condos. My condo is subject to rent control until i sell it in a bona fide sale because the four of us Ellis acted and owner-move in evicted the tenants. We then occupied each unit for the entire 8 years. When I sell my unit, the new owner can rent it free from rent control. What the city doesn’t understand is that this practice DECREASES rental stock because I have no choice but to sell it. I get punished for improving the building , reporting crime, and removing trash and grafitti regularly? I could rent it plenty cash flow positive , as my cost basis is super low, but why would I go down the slippery rent control slope? And the next buyer can’t rent it because the rent on this condo would never cover the mortgage. So this will always be an owner-occupied unit and NEVER a rental again because the numbers don’t work. So now that I face rent control, I certainly wouldn’t rent this to an elderly or starving artist type, because I would assume they would never leave. (asking for tenant discrimination) I won’t go down that slippery slope , and neither would the two other owners in my building who already sold rather than put these units back on the rental market. If the tenants union was as good as they think they are, they would make an exception to this Rent control law and allow me, and owner occupier for eight years, not a speculator, to help EXPAND the rental stock.

  5. Q1: Condo conversion for 2-units is currently taking 16-18 months assuming you don’t have a ton of work to bring the units/building up to code. you must owner-occupy for one year but can start the inspection/work to bring up to code on day one. If you rent before you are on file with the city as being a condo, you are subject to rent control.

    Q2: Once converted, you are not subject to full rent control unless you have tenants who occupied prior to Jan 1996 (doesn’t apply to you). You are still held to the just casue evictions but can rent for any amount you wish.

    Q5: Yes if you rented before condo converting

  6. After doing some digging, I agree with Dede: Costa-Hawkins should exempt the condo, like a home, from rent control, BUT check with an attorney. The SF Rent Control Ordinance has a specific exemption from its definition of “rental unit” for units covered by Costa Hawkins -see Section 37.2(r)(7) somewhere in this pile of gobbledy-gook: http://www.sfgov.org/site/rentboard_page.asp?id=6131.

    For a detailed explanation of Costa-Hawkins in something approaching plain English, I found this on the California Apartment Owners website: http://www.caanet.org/AM/Template.cfm?Section=Web_Site&CONTENTID=7224&TEMPLATE=/CM/ContentDisplay.cfm .

    Bottom line — caution! It’s really worth talking to an attorney who specializes in this stuff.

  7. David Gellman, condo attorney:

    The State’s Costa-Hawkins law does indeed lift annual rent caps imposed under local Rent Control ordinances (like San Francisco’s) for most single-family residences, including condos. However, a special exception withholds this benefit from condo converters themselves and, for the most part, limits Costa-Hawkins benefits to buyers of condos only, not to the original converters.

    Btw, our office is now able to complete 2-unit condo conversions in SF in less then three months.

    (My comments above are for informational purposes only, and should not be relied on as legal advice about specific situations. You should consult an attorney if you need help with legal matters)

    [Editor’s Note: We highly recommend David and his team, and thank him for chiming in…unsolicited.]

  8. Hi Alex and frontsteps readers,
    This Letter to the Editor just got published in SF Bsns Times – thought you might enjoy it. I have been a mortgage broker in San Francisco for many years, and remember asking Carol Ruth Silver about “means testing” tenants before granting them rent control status. She seemed to think that was an invasion of privacy. I pointed out the Mortgage Credit Certificate program, as well as the Redevelopment Agency’s BMR (Below Market Rent) program required applicants to submit tax returns. San Francisco’s rent control constitutes a government taking, plain and simple. Subsidizing housing costs on the backs of housing providers is despicable. SF Board of Supervisors continues to criminalize the act of providing housing. Shall we pay our Housing Director $188,000 a year, only to find the FBI closing their offices to search for Section 8 fraud? Section 8 recipients have to DOCUMENT their low income status, and I am proud to have my tax dollars allocated to those who need government assistance. Not so with Rent Control San Francisco style. This City grants life estates to some lucky tenants regardless of their income. It’s an arbitrary giveaway, lacking even a means test, and fails to help the less fortunate. San Francisco needs to quit ignoring economic reality to kowtow to the Self Perpetuating tax dollar financed Tenant Activists, and cease extorting these subsidies from private citizens. I believe passionately that this pig headed pounding on property rights undermines a compassionate agenda, where the truly needy are cast aside for the exigencies of the moment.

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