What is a condominium?
A condominium consists of an individually-owned "Unit" and a share of group-owned "Common Area". The "Unit" is the space within the walls, floors and ceilings of a dwelling, and the "Common Area" is the remainder of the property. Owners pay their own mortgages, property taxes, and utilities, plus monthly "Homeowners' Association Dues" to cover repair and insurance of the Common Area. A lengthy document called the "Covenants, Conditions and Restrictions" or "CC&Rs" establishes the rights and duties of the condominium owners.
What properties qualify for conversion?
Only 2-6 unit properties may convert. They qualify only when they (i) meet occupancy requirements, (ii) win or bypass the conversion lottery, and (iii) for lottery conversions, satisfy "tenant rights" rules.
Can eviction history disqualify buildings from being converted to condominiums?
A building from which one “elderly” (60 or over) tenant in occupancy 10 years or more, or one disabled or catastrophically ill tenant, was evicted for any reason unrelated to the tenant’s behavior after May 1, 2005, can never be converted to condominiums. This restriction applies without regard to whether the current owner initiated or otherwise participated in the evictions. “Eviction” is defined to mean the issuance of a notice terminating tenancy even if the tenant later leaves without further legal action (or in exchange for a “tenant buyout”). But if a property owner issues then withdraws the eviction notice prior to its expiration and the tenant receiving the notice remains in tenancy for at least 120 days following the expiration of the notice, the action would not deemed to be an “eviction”. Eviction history can also affect a building’s odds of winning the lottery, and whether a two-unit building can bypass the lottery.
How do you bypass the condominium lottery?
Two unit buildings with a clean eviction history bypass the conversion lottery if both units are occupied for one year by separate (unmarried) individuals who each own at least a 25% interest in the property during the entire occupancy period. This exemption from the lottery is also applicable to mixed use buildings having no more than two residential units, both of which are owner occupied. Occupancy is proven by sworn statement. No other building types can bypass the lottery. Vacant apartments do not count as owner-occupied. A two-unit building cannot bypass the lottery if an elderly (over 60 who has resided in the building for 10 years), disabled or catastrophically ill person was evicted from the building after November 16, 2004. A building from which two or more tenants (regardless of age or disability) were evicted from separate units for any reason unrelated to the tenants’ behavior after May 1, 2005 can be converted only after 10 years of owner-occupancy unless each unit was occupied by a separate owner on April 4, 2006.
Which buildings can enter the condominium conversion lottery?
For a building to qualify to enter San Francisco’s condominium conversion lottery, at least one unit must have been owner-occupied for the three immediately preceding years. The number of units that must be owner-occupied increases to three for 5-6 unit buildings. Each qualifying owner-occupant need only be an owner at the time the building enters the lottery; he/she could have been a rental tenant in the building for the previous three years. Occupancy is proven by sworn statement. The three-year period is measured backwards from the lottery entry deadline. So to qualify in 2011, the required number of owners must have occupied continuously since January 2008. The three-year occupancy requirements are extended to 10 years for any building from which two or more tenants (regardless of age or disability) were evicted from separate units for any reason unrelated to the tenants’ behavior after May 1, 2005.
How does the condo conversion lottery work?
The condominium lottery is held annually during the first quarter of the calendar year. Tickets cost $250 and are available for a two-month period ending about two weeks before the drawing. Up to 200 units may be converted through the lottery each year. Note that the lottery selects 200 units, not 200 buildings. The actual number of buildings that convert to condominiums annually through the lottery system is only 50-60, depending on the total number of dwellings in the winning buildings.
The lottery system is designed to favor buildings that have previously lost. To create this preference, the lottery drawing is divided into two parts, each of which selects 25-30 winning buildings that, collectively, comprise 100 dwelling units. The first part of the selection process, called "Pool A", selects winners from among applicant buildings that have lost the lottery at least three times, and is designed to guarantee that a building that continues to participate will eventually be guaranteed to win. The second part of the selection process, called "Pool B", is open to all applicants and operates by random selection. The overall idea is that your chances of winning will increase each time you enter, but this goal had been undermined in recent years by the rapid increase in the number of buildings entering the lottery.
Pool A buildings are grouped according to the number of years they have entered and the continuity of ownership during the period of entry and loss (as discussed in the next section). Buildings that have previously entered and lost seven times are considered "Class 7", buildings that have entered and lost six times are considered "Class 6", and so forth. If the number of units in the most senior Class is less than 100, all of the buildings in that Class automatically qualify for conversion. The unused Pool A places are then available for the next most senior Class. For example, if the total number of units in the senior Class is 32, 68 places will be available for the next Class. When the number of units in a particular Class exceeds the number of places remaining in Pool A, a lottery drawing will select the winning buildings from that Class.
Buildings that do not qualify for, or are unsuccessful in, Pool A, are eligible to participate in Pool B. Each Pool B entrant gets a number of tickets equal to the number of times it has participated in the condominium lottery, provided there has been a continuity of ownership during the period of entry and loss (as discussed in the next section). For example, a first-time lottery entrant gets one Pool B ticket while a fifth-time entrant (with continuity of ownership) gets five.
How does continuity of ownership affect lottery priority?
The method by which San Francisco’s Bureau of Street Use and Mapping (“BSM”) determines a building’s class level in Pool A, and its number of tickets in Pool B, is the most controversial aspect of the conversion lottery system. Under a provision added to the written law in 2007, a building is entitled to multiple lottery tickets if “the required number of qualified owners of the building were owners of the building at the time of the lotteries in which the building participated but failed to be selected for conversion.” A natural reading of this language would be that each of the owners whose occupancy is qualifying the building to enter the lottery (one three-year occupant is required for a 2-4 unit building, and three for a 5-6 unit building) must have been an owner during the previous lottery losses. It does not seem to require either that each qualifying owner-occupant have been an occupant (as opposed to just an owner) during the previous losses, that he/she had been in occupancy for at least three years prior to each loss, or that his/her owner occupancy have been continuous. Also, it does not seem to apply to Pool A, since it is impossible to obtain multiple tickets in Pool A.
In practice, BSM applies all of these additional, unwritten requirements. BSM’s lottery entry instructions explain that 2-4 unit buildings “may obtain only as many tickets as the amount of years that its most senior qualified owner has participated in the lottery”, and 5-6 unit buildings “may obtain only as many tickets as the most junior of the three longest tenured qualified owners that have participated in the lottery.” Moreover, according to the BSM instructions, “the qualifying individual(s) shall maintain the initial qualifications without interruptions or change of any kind”. Under this BSM policy, 2-4 unit owners would first determine which current owner-occupant has lived in the building as an owner continuously for the longest. That owner would be the lottery applicant. BSM would then determine the first lottery year in which that owner could have qualified the building to enter (by having then lived in the building continuously for at least three years). Starting with that year, BSM would count the number of years in which the building had lost, and that number would be the number of lottery tickets given to the building. For a 5-6 unit building, the applicants would be the three current owner-occupants that have lived in the building longest, and the one of these with the shortest occupancy duration would determine the number of lottery tickets given to the building.
BSM’s current policy is to use this unwritten procedure not only to determine how many lottery tickets the building receives for Pool B, but also its eligibility and class seniority in Pool A. This practice seems to directly contradict the written law, which states that Pool A eligibility and class status is determined by “the number of times a building has participated in and failed to be selected in any lottery”. Inability to participate in Pool A significantly affects a building’s likelihood of conversion because, in theory, a building that continues to qualify and participate in Pool A is guaranteed to be selected for conversion, while a building that can only participate in Pool B is statistically unlikely to ever win the conversion lottery. Here is an illustration of the lottery priority system as applied. A six unit building has been owner occupied for 11 years and has participated in the lottery seven times. Two of the units have been occupied by the same owners for all 11 years, and the other four units have been occupied by the same owners for the past seven years. Under the written law, the building would participate in Pool A as an eighth-year entrant and be guaranteed to win. But under the BSM priority policy, the third qualifying owner, which will be one of the seven-year owner-occupants, will determine lottery priority. Since each of these seven-year owner-occupants did not meet general lottery entry requirements until 2007, and did not meet Pool A entry requirements until 2010, the building would participate in the 2011 Pool A as a 2nd-year entrant, and in the Pool B drawing with four tickets, and its overall chances would be less than 2% (see discussion of lottery odds below).Here is a second illustration. A four-unit building has been owner-occupied continuously for 12 years and has participated in the lottery seven times. The same four owners have owned the building throughout the 12 years. Two of the owners outgrew the apartments and moved after living in the building for 10 years, and their apartments are now tenant-occupied. One owner had a one-year job assignment overseas in 2004, and another needed to care for his elderly mother on the east coast for six months in 2006. Under the written law, the building would participate in Pool A as an eighth-year entrant and be guaranteed to win. But under the BSM priority policy, the senor owner occupant would be the one who had the overseas job for a year in 2004. That person did not re-qualify to enter the lottery until 2008, and will not re-qualify the building to participate in Pool A until 2011, meaning the building will participate the 2011 Pool A as a 1st-year entrant, and in the Pool B drawing with three tickets, and its overall chances would be less than 2%.
How does eviction history affect a building’s odds of winning the conversion lottery?
Buildings from which an elderly, disabled or catastrophically ill tenant was evicted after November 16, 2004, for reasons unrelated to the tenant’s behavior, are not eligible to participate in the Pool A lottery selection process, and are made part of the Pool B drawing only after the first three quarters of the winners have been selected. Eviction history is initially determined through a sworn statement by applicant owners, and subsequently verified through the records of the San Francisco Rent Board and San Francisco Human Rights Commission. As noted above, the inability to participate in Pool A is very significant because it is only through Pool A that a building is theoretically guaranteed to win the lottery eventually. The limitation on Pool B eligibility further diminishes the possibility that a building with a post-November 2004 protected tenant eviction will be selected.
According to the written law, buildings from which an elderly, disabled or catastrophically ill tenant was evicted between January 1, 2000 and November 16, 2004 are also ineligible to participate in Pool A, but it is unclear whether the City enforces this provision. BSM’s written instructions do not acknowledge the existence of the January 1, 2000 law, and no portion of the conversion application submittal for lottery winners asks about pre-2004 evictions. When asked for comment on the enforcement of the January 1, 2000, a BSM official stated that the law is enforced, and that BSM consults the Rent Board and Human Rights Commission records to establish whether protected tenant eviction occurred between January 1, 2000 and November 16, 2004. The official offered no explanation of why no sworn statement regarding pre-2004 eviction history was required, whether BSM checks Rent Board and Human Rights Commission records for all Pool A applicants or only Pool A winners, or how BSM would retroactively repair the lottery process if it disqualified a Pool A winner after the drawing.
What are the odds of winning the condo conversion lottery?
The chances of winning the condominium conversion lottery are poor and have been dropping significantly each year since 2006. The real estate market slump during the years 2008-2010 has diminished the number of new buildings entering the lottery system, and this development should begin to increase lottery odds in 2016. But until then, we expect the odds to remain poor for all but the senior Pool A lottery class.
In 2012, the senior Pool A class was the 8th year entrants, which consisted of 15 buildings containing a total of 45 units. Since there were fewer than 100 units in this group, all of the 8th year entrants automatically won the condominium conversion lottery in 2012. The 7th year entrants consisted of 64 buildings with 195 total units. These buildings first competed for the remainder of the 100 unit allotment in Pool A, and then competed in Pool B with seven tickets each. Of the 64 7th year buildings, 23 were selected for condo conversion. Buildings in the condominium lottery for the 1st, 2nd, 3rd, 4th, 5th or 6th time participated only in the Pool B drawing, had winning odds of 1%-9% depending on the number of years of prior participation.
For 2013, we project that the 8th year buildings will again be the senior class. There will be 41 8th year buildings with a total of 124 units. Since this group includes more than 100 units, not all 8th year entrants will win the 2013 condominium lottery. Rather, taking into account their chances of selection in both the Pool A and the Pool B drawings, their odds of winning will be 91%. The other participants in the 2013 condo lottery will have the following odds of being selected for condominium conversion: 9.43% for 7th year buildings; 8.08% for 6th year buildings; 6.73% for 5th year buildings; 5.39% for 4th year buildings; 4.04% for 3rd year buildings; 2.69% for 2nd year buildings; and 1.35% for 1st year buildings.
Winning buildings must submit a conversion application by a summer deadline. Under the present system an additional 20 buildings are picked at the time of the lottery to go on a standby list in case winners fail to submit applications or are rejected for failure to qualify.
What are the "tenant intent to purchase" requirements?
Lottery winners must submit "tenant intent to purchase" forms signed by residents of at least 40% of the units. The signers may be renters or owner-occupants. These forms state that the signer intends to buy his/her unit as a condominium, but may later decide not to buy. Under this system, only 3-4 unit buildings with a solitary owner-occupant need renter cooperation to satisfy the requirement.
What are the "tenant rights" rules?
All renters (including those who do not sign a "tenant intent to purchase" form) get an opportunity to purchase after conversion at a price established by the owner, all non-purchasing renters get one-year rent-controlled leases, and all disabled and senior (over 62) renters get lifetime rent-controlled leases. At the conclusion of a lease period, renters may be evicted in connection with the sale of a unit. All tenants must be notified of their rights before a lottery conversion application is filed.
What building code requirements apply to conversion?
Converting buildings need not meet current building codes, be seismically upgraded, or have parking. But the City does require a building inspection. The inspection process has six steps: (i) submittal of the inspection request form and fee, (ii) a site visit by City building, plumbing and electrical inspectors, (iii) issuance of a written inspection report, (iv) receipt of a building permit for corrective work, (v) completion of all required work, and (vi) City inspection of the work and issuance of a completion certificate known as a “CFCO”. Recently, there has been a delay in obtaining inspections. For two-unit buildings bypassing the lottery, applying for an inspection several months before the one-year occupancy requirement is reached can expedite the conversion. Note that once a City inspection is requested the cited work must be completed whether or not the conversion is pursued.
Inspection reports typically cover three types of problems: (i) work which was completed without required permits (including everything from kitchen renovations to decks to in-law units), (ii) conditions which present safety hazards (like poor fire egress or dangerous electrical wiring), and (iii) energy and water conservation violations. In cases where a significant amount of work is suspected pre-inspection by a private consultant familiar with conversion requirements may be beneficial. Such a consultant can provide advance warning of likely inspection issues, recommend prophylactic measures to minimize work requirements, establish the legality of preexisting improvements, and obtain building permits.
How do qualifying properties begin conversion?
Owners of qualifying buildings (either lottery winners or lottery bypassers) must submit an application package to the City. The major components of the package are:
- Inspection: Before submitting a conversion application, you must request a City inspection by mailing in a form and the required fee. The receipt for the inspection fee is part of the conversion application, but you need not have had your inspection in order to submit the conversion application.
- Survey: Conversion requires a survey or "condominium map" prepared by a licensed land surveyor which locates the boundaries of the property and footprint of the building. The map and plan take 3-6 weeks to complete. (Note that the surveyor will also prepare unit diagrams, which show the location of the condominium units and other private areas, but the unit diagrams are not part of the City application package.)
- Occupancy: Owners or renters needing to prove occupancy must sign a sworn statement. Owners must also provide evidence they have taken a homeowner's property tax exemption.
The package must also include a variety of other items which an attorney can help you compile.
How long does application processing take?
The application is processed by the Department of Public Works with approval required by several additional city departments. During 2012, the median length of a 2-4 unit conversion has been 5 months from application submittal. This timeline includes the time it takes the owners to make required building improvements. In cases where all improvements have been completed before application submittal, median processing time has been under 4 months. Processing of 5-6 unit properties, which requires additional City approvals and a State approval, has taken about 4 additional months. A professional with knowledge of the process and the processors, and the ability to focus on the progress of the application, can accelerate approval.
What other documentation is required?
All condominiums must have CC&Rs which describe the rights and duties of the owners. CC&Rs should be prepared by an attorney and include:
- Homeowners' Association decision making
- Operating budget and maintenance reserve
- Division of financial responsibilities
- Management and record keeping systems
- Maintenance, alteration and usage rules
- Unit diagrams showing the units and other assigned areas such as parking and storage
Properties of 5-6 units must also obtain a "Final Subdivision Public Report" from the California Department of Real Estate by submitting a separate application.
What steps remain after an application is approved?
The approved survey must have a notarized signature from all recorded owners and, in the case of 5-6 unit buildings, all lenders. It is then returned to the City with an updated title report, a certificate of completion of the inspection work, and a Tax Certificate showing property taxes are paid current. The building officially becomes condominiums when the survey and CC&Rs are recorded.
Final recordation does not alter the ownership or financing of the property. All of the condominiums in the building remain owned by the same individual or group, and all remain subject to the same mortgage. Thus if two owners each own 50% of a duplex before conversion, they will each own 50% of both condominiums after conversion. Separation of the condominiums so that particular owners have title to particular units generally requires refinancing with separate mortgages for each unit.
What are the costs of conversion?
The following are the costs incurred in a typical San Francisco condominium conversion:
- City Fees: The City charges an inspection fee ranging from $2346 for two units to $2700 for six units, an application fee of $9,336 (2-4 unit) or $9,450(5-6 unit), a $250 lottery fee, a 3R report fee of $160, and a recording fee of about $12.
- State Fees: The State application is required only for 5-6 units, and the fee is currently about $1,700. The State also requires a formal budget which is best prepared by a professional budget preparer at a cost of about $4,000.
- Surveyor: Surveys start at about $5,000 and increase with building size.
- Attorney: Typical attorney services include preparation of the City Application, monitoring/troubleshooting, advice on space assignment, CC&Rs, and assistance in lender signing and recordation.
- Repairs: Building permit fees and repair costs depend on the extent of needed work.
- Title: Most title companies will provide required title reports free of charge if the owner promises to use the same company for a post-conversion sale or refinance of the property.
- Lender: Lender charges to sign the survey range upwards from $750.
Must the pre-conversion lender consent to the condominium conversion?
Until June 2006, the San Francisco Department of Public Works (“SFDPW”) would not record the condominium map (the event that signified completion of the condominium conversion process) unless all lenders with mortgages on the property had signed the map signifying their assent to the conversion. If a conversion applicant could not get his/her lender to sign, he/she could not complete the conversion without refinancing with another lender that would agree to sign. Often, this requirement caused delay while the refinancing occurred, and imposed significant additional costs in the form of appraisal fees, loan origination costs, and title and escrow expenses. The new loan would typically be paid off immediately after the condominium map was recorded as the owners sold or financed the condominiums. This inconvenient and expensive process was becoming more and more common as an increasing number of lenders refused to sign.
SFDPW announced in June 2006 that it will no longer require the consent of a property’s existing mortgage lenders in order to allow a 2-4 unit property to be converted to condominiums. Although the new policy will allow most owners with non-compliant lenders to complete their conversion, these owners will not be able to record their covenants, conditions and restrictions (“CC&Rs”) until they are ready to sell or refinance the condominiums. California law requires that lenders sign the “condominium plan” (an attachment to the CC&Rs which shows the spaces included within each condominium) as a condition of condominium formation. As a result, where the pre-existing lender has not signed the condominium plan, title companies will require that funds from replacement loans (either refinance loans or purchase loans) be in an escrow account with the title company before the CC&Rs and condominium plan can be recorded. This requirement will impose only a minor inconvenience on condo converting owners because there is no reason to record the CC&Rs and condominium plan until the owners are ready to sell or refinance.
Note that the new SFDPW policy does not apply to buildings containing more than four units. Such buildings will continue to need to obtain lender signature on their condominium maps.
Do I need to refinance after conversion?
Refinancing is not required by most lenders but is necessary prior to transferring any of the condominiums individually. Most owners refinance for the following reasons: (i) to allow the condominiums to be transferred to individual owners or sold separately, (ii) to eliminate the default risk associated with sharing a loan obligation with other owners, (iii) to eliminate the risk that a future job loss, illness, or credit blemish will make refinancing difficult or impossible, (iv) to qualify a unit for eventual exemption from San Francisco's limitation on rent increases, or (v) to replace one large loan on the entire building with several smaller and lower-interest loans on individual condominiums.
Will conversion increase my property tax?
Conversion will not increase the assessed value of your property. The current value will be allocated among the condominiums, and each condominium will get a separate tax bill based on the allocation.
Will conversion increase my insurance premiums?
Conversion often increases insurance costs, particularly in 3-6 unit buildings, and you may be required to switch insurance carriers. Consulting your insurance agent early in the conversion process will help eliminate unpleasant surprises once the conversion is complete.
About the Author
Sirkin & Associates has been guiding clients through San Francisco condominium conversions and subdivisions for almost 20 years, and have completed more SF conversions than any other firm. Over the years, we have been involved in drafting many of the laws that govern SF condominium conversions, and have helped develop many of the procedures used by the San Francisco Department of Public Works (“DPW”) Bureau of Street Use and Mapping (“BSM”). Our breadth of experience makes it likely that if a glitch appears in the condominium conversion process, we will have seen something similar before and know exactly what to do. And for those rare occasions when a completely new issue arises, we are the recognized masters at developing creative solutions that save our clients time and money.
Experience has taught us that the most important things to our clients are the immediate availability of staff to answer client questions and diligence in following the process of governmental approval. To ensure we achieve these goals, we have a full-time paralegal, Cam Perridge, devoted to client contact, preparation of subdivision applications, and monitoring subdivision approvals. Cam maintains a direct-access telephone line and can be reached easily any weekday to discuss the status of a conversion or subdivision process. And for those occasions when you need to speak with an attorney, Andy Sirkin is committed to being available to you when you call or within the next 24 hours. Andy is known for his diligence in calling clients back quickly, and is more committed than ever to being easily reached.
But while processing the condominium conversion or subdivision quickly and efficiently may be our client’s most immediate priority, the governing documents (the Declaration of Covenants, Conditions and Restrictions, or “CC&Rs” supplemented in some cases by Bylaws and/or Articles) will have much greater long-term impact. The quality of the governing documents will directly affect the quality of life of the owners, as well as their ability to refinance and sell. Andy Sirkin has been co-author of the past 10 editions of The Condominium Bluebook, and his expertise in preparing condominium governing documents is recognized throughout California. Sirkin & Associates governing documents continue to be the ones other firms emulate, and Realtors, lenders and buyers strongly prefer. This leadership results from constant improvement and innovation that makes our documents easier to read and understand, as well as more efficient and less expensive to enforce.
Before you choose a lawyer to handle you condo conversion or new construction subdivision, take a moment to speak with Cam, Andy, or attorney Rosemarie MacGuiness, at Sirkin & Associates. Our practice includes all required City and State applications and filings, as well as preparation of any governing documents you may need. We offer these services on a flat-fee basis, and our rates are generally lower than those of other firms. Contact us via email at DASirkin@earthlink.net, or by telephone at 415-738-8545.