San Francisco Condominium Conversion Rules and Process

By Andy Sirkin (5/31/22)

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?

Buildings with more than four residential units are not eligible for conversion. Buildings with 2-4 residential units may qualify for conversion two ways: (i) automatic (lottery bypass) qualification for two-unit buildings where each unit is owner-occupied be a separate owner; or (ii)  the annual conversion lottery, which has been suspended but is expected to return beginning in 2024, 2025 or 2026.

Can eviction history disqualify buildings from being converted to condominiums?

A building’s eviction history may disqualify or delay its conversion. The specific rules relating to eviction history are complex, and depend on who was evicted, the legal basis for eviction, when the eviction occurred, whether the tenant re-occupied after eviction, and which conversion eligibility program the building wishes to use. For detailed information on how past evictions effect eligibility for condominium conversion, see the article entitled The Effect of Eviction History on San Francisco Condominium Conversion Eligibility. To learn about a building’s tenant eviction history, contact the San Francisco Rent Board.

Can a past “tenant buyout” disqualify buildings from being converted to condominiums?

A tenant buyout can affect a building’s eligibility for a lottery conversion, but will not affect eligibility for a duplex bypass conversion. A “tenant buyout” occurs when a tenant agrees to leave voluntarily in exchange for money or other consideration from a building owner. Effective March 2015, all tenant buyouts must be reported to the San Francisco Rent Board, and meet certain other requirements. Any tenant buyout that occurs after October 31, 2014 can disqualify a building from conversion, or delay conversion eligibility. If the buyout involved an elderly (over 60) or disabled person who has resided in the building for 10 years, or if the buyout involved a or catastrophically ill person (regardless of residency duration), the building is disqualified from entering the condominium conversion lottery. If the buyout involves tenants in two or more units, none of whom satisfy the “protected” criteria described in the preceding sentence, then the normal three-year owner-occupancy duration requirement is extended to 10 years. To learn about a building’s tenant buyout history, contact the San Francisco Rent Board.

How do two-unit buildings 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. Vacant apartments do not count as owner-occupied, and spouses cannot occupy two separate units unless they are legally separated. 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.

Can buildings with illegal or unwarranted units convert under the two-unit lottery bypass rules?

If City records show evidence of the existence of an illegal in-law or granny unit, conversion under two-unit bypass rules may be difficult or impossible. The policy of the SF Planning Department creates a sort of “catch 22” for buildings with illegal third units. On the one hand, legalizing the third unit means the building is no longer eligible to convert under two-unit rules; on the other hand, removing the illegal unit requires a building permit that can be impossible to obtain due to laws and policies designed to preserve existing housing. Legalizing the space as an accessory dwelling unit may be a solution but, as discussed in the next paragraph, there remains ambiguity regarding City policy on this issue.

In theory, the presence of an accessory dwelling unit or ADU should not disqualify a building from a lottery bypass conversion so long as the ADU does not become a third condominium (i.e. the ADU is made shared common area or becomes part of another condo). But City policy on this issue remains inconsistent and unclear, and is not codified in the conversion laws.

Does the presence of an accessory dwelling unit (and ADU) effect eligibility for a duplex fast-track condo conversion?

In theory, the presence of an accessory dwelling unit or ADU should not disqualify a building from a lottery bypass conversion so long as the ADU does not become a third condominium (i.e. the ADU is made shared common area or becomes part of another condo). But City policy on this issue remains inconsistent and unclear, and is not codified in the conversion laws.

Which buildings can enter the condominium conversion lottery?

San Francisco’s condominium conversion lottery has been suspended. The lottery will resume in 2024, 2025 or 2026. When the lottery returns, it will be open to 2-4 unit buildings in which all but one of the units have been owner-occupied continuously by the same owner for at least three years. 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 2024, the required number of owners would need to have occupied continuously since January 2021. Note that the owner-occupancy period can be extended as the result of the building’s eviction/tenant buyout history. Buildings with five or more residential units are not eligible for condominium conversion in  San Francisco.

How does the condo conversion lottery work?

The condominium lottery is held annually during the first quarter of the calendar year. Tickets 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 55-70, 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 25-35 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 8”, buildings that have entered and lost six times are considered “Class 7”, 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?

A building gets credit for past lottery participation based upon the number of years that its most junior current qualifying owner could have participated in the lottery. This means that in a four-unit building, where three qualifying owner-occupants will be required, lottery priority will be determined based upon the duration of the occupancy of the owner that moved in the latest. If the building had lost the lottery seven times, but currently has only two owner-occupants that have been in the building since it first became owner-occupied, it will not get credit for all its losses; rather, it will get credit only for those years in which the third qualifying owner-occupant had eligibility. This means that in Pool A, which requires three years of owner-occupancy plus three years of lottery losses, the building will get credit only for those losses that occurred after the most junior of the three qualifying owner-occupants had been in the building for six years.

What are the odds of winning the condo conversion lottery?

At the time of its suspension in 2013, the chances of winning the condominium conversion lottery were very poor. We anticipate that the odds of winning the lottery when it comes back is likely to be better than it was at the time the lottery was suspended, but still relatively low.

What rights to tenants have when their building is being converted to condos? Do tenants have a right to purchase their apartment after it is converted? Can tenants be evicted before, during or after condominium conversion?

Buildings with rented units must comply with additional requirements. All renters get an opportunity to purchase after conversion. The tenant can exercise the purchase right regardless of whether the owner wants to sell, but the owner can effectively discourage purchase by setting the price as high as he/she wishes. Disabled and senior (over 62) renters get lifetime rent-controlled leases, and other tenants get one-year rent-controlled leases. All tenants must be notified of their rights before a lottery conversion application is filed. Contrary to popular misconception, converted units are not exempt from most rent control restrictions until they have been sold following conversion. But at the conclusion of a lease period, renters may be evicted in connection with the sale of a unit.

What is a lifetime lease?

A lifetime lease is a written contract between the owner and the tenant under which the tenant is entitled to possession of his/her apartment until he/she dies. If the tenant is living in the apartment when he/she dies, and there is surviving household member who is elderly or disabled, the lease continues until that person’s death. A lifetime lease tenant cannot be evicted except for non-payment of rent or other lease violations. This means no owner move-in, relative move-in, renovation, or Ellis Act eviction of the lifetime lease tenant by the current owners or subsequent owners.

Note that unlike an ordinary rent-controlled tenant, a lifetime lease tenant does not lose his/her rights when he/she vacates the unit. The tenant can move out and still keep the apartment; but this does not necessarily mean the tenant can allow others to live there.

What building code requirements apply to condo conversion? Must the building be brought up to code to convert?

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 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 receiptfor 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 the recent pandemic, processing has been taking 12-18 months; however, we are optimistic that processing time with return to its historical average of 6-12 months shortly. This timeline includes the time it takes the owners to make required building improvements. 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

What steps remain after an application is approved?

The approved survey must have a notarized signature from all recorded owners. 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 condo conversion?

The following are the costs incurred in a typical San Francisco condominium conversion:

  • City Fees: The City charges an inspection fee, an application fee, and a 3R report fee, and a recording fee. Contact us for the current amount of these charges.
  • Property Tax Prepayment: Depending on the time of year when the conversion application is approved, owners may be required to pre-pay a significant amount of property tax; however, this is only a prepayment based on current assessed value, and not an increase in the tax rate or the tax amount.
  • 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. We offer these services on a flat fee basis. Contact us for the current amount of our flat-fee conversion services.
  • 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.

Must the pre-conversion lender consent to the condominium conversion?

SFDPW no longer requires the consent of a property’s existing mortgage lenders in order to allow a 2-4 unit property to be converted to condominiums. Although this policy allows 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 imposes 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.

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 risk that a future job loss, illness, or credit blemish will make refinancing difficult or impossible, and/or (iii) 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

SirkinLaw APC has been guiding clients through San Francisco condominium conversions and subdivisions for more than 30 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 team devoted to client contact, preparation of subdivision applications, and monitoring subdivision approvals. Our team 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, Rosemarie MacGuinness is committed to being available to you when you call or within the next 24 hours. Rosemarie is known for her 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 was co-author of 10 editions of The Condominium Bluebook, and his expertise in preparing condominium governing documents is recognized throughout California. SirkinLaw APC 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 Andy or Rosemarie at SirkinLaw APC. 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 our contact form.