San Francisco’s Condo Conversion Lottery System

By Andy Sirkin

How the San Francisco Condo Conversion Lottery Works

As of June 11, 2013, there is new condominium conversion law in San Francisco, and the traditional conversion lottery system has been suspended until at least 2024. For information on conversion under the new law, see the article entitled New TIC Condo Conversion Law. This Article will describe the condominium lottery procedure that will be used when the lottery returns. For an explanation of the requirements for entering the condominium conversion lottery, and for condo conversion in general, see ( San Francisco Condominium Conversion Laws and Instructions).

Condo Lottery Priority: The Lottery Pool System

The condo 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 ensure 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.

POOL A

In 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 below). 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 apartments 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 apartments in the senior Class is 32, 68 places will be available for the next Class. When the number of apartments in a particular Class exceeds the number of places remaining in Pool A, a lottery drawing will select the winning buildings from that Class.

Participation in Pool A is limited by three factors: (i) The eviction history of the building; (ii) The number of times the building has previously participated; and (iii) The continuity of ownership and occupancy during the period of entry and loss.

According to the written law, buildings from which an elderly, disabled or catastrophically ill tenant was evicted after January 1, 2000, for reasons unrelated to the tenant’s behavior, are ineligible to participate in Pool A. But it is unclear whether the City enforces this provision. The San Francisco’s Bureau of Street Use and Mapping (“BSM”) 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. On the other hand, a BSM official recently 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 after January 1, 2000. What is absolutely clear is that BSM closes Pool A to all buildings where the “no fault” elderly or disabled tenant eviction occurred after November 16, 2004. The lack of a post-2004 eviction is the subject of a mandatory sworn statement by each lottery applicant.

Pool A applicants who are not disqualified by eviction history must demonstrate participation in at least three prior lotteries. This requirement comes from 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”. Since the 2008 lottery, BSM has also applied additional, unwritten requirements relating to the continuity of ownership and occupancy during the building’s previous lottery participation. Specifically, BSM requires that the 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, and that his/her owner occupancy has been continuous. (For an explanation of the number and occupancy duration of owner occupants needed to enter the lottery, see ( San Francisco Condominium Conversion Laws and Instructions).

BSM’s continuity provisions impact Pool A class as well as eligibility. For 2 unit buildings with one owner-occupant, the agency determines a building’s Pool A class according to the number of years that its owner-occupant has participated in the lottery. BSM determines the first lottery year in which that owner could have qualified the building to enter Pool A (by having then lived in the building continuously for at least three years and, subsequently, qualified for and lost in the Pool B selection process). Starting with that year, BSM would count the number of years in which the building had participated and lost, and that number would be determine the building’s class ranking in Pool A.

For 3-4 unit buildings, class determination is based on the number of years that the most junior of its qualifying owner-occupants has participated in the lottery. The number of owner-occupants required for conversion of a triplex is two, and the number of owner-occupants required for conversion of a four-plex is three. So, in the case of a triplex, BSM first establishes which two of the owner-occupants have lived in the building as owners continuously for the longest, and focuses on the one of these with the shortest duration of owner-occupancy. BSM then determines the first lottery year in which that owner could have qualified the building to enter Pool A (by having then lived in the building continuously for at least three years and, subsequently, qualified for and lost in the Pool B selection process). Starting with that year, BSM would count the number of years in which the building had participated and lost, and that number would be determine the building’s class ranking in Pool A. Similarly, in the case of a four-plex, BSM first establishes which three of the owner-occupants have lived in the building as owners continuously for the longest, and focuses on the one of these with the shortest duration of owner-occupancy.

To illustrate, imagine a four 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 two 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. But under the BSM priority policy, the third qualifying owner, who is one of the seven-year owner-occupants, will determine Pool A class. Since each of these seven-year owner-occupants did not meet general lottery entry requirements four years ago, and did not meet Pool A entry requirements one year ago, the building would participate in Pool A as a 2nd-year entrant.

POOL B

Buildings that do not qualify for, or are unsuccessful in, Pool A, are eligible to participate in Pool B. In general, each Pool B entrant gets a number of tickets equal to the number of times it has participated in the condominium lottery. But, as with Pool A, both eviction history, and continuity of ownership and occupancy, affect the building’s status in the Pool B drawing.

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 made part of the Pool B drawing only after the first three quarters of the winners (buildings containing a total of 75 residential units) have been selected. The limitation on Pool B participation further diminishes the already remote possibility that a building with a post-November 2004 protected tenant eviction will be selected.

Applicants seeking multiple tickets in Pool B must demonstrate that “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 (which was added to the written law in 2007) would be that each of the owners whose occupancy is qualifying the building to enter the lottery must have been an owner during the previous lottery losses. The language does not seem to require 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.

But, as with Pool A, BSM applies additional, unwritten requirements relating to the continuity of ownership and occupancy for multiple tickets in Pool B. For 2 unit buildings, the agency determines the first lottery year in which the 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 counts the number of years in which the building has lost, and that number establishes the number of Pool B tickets given to the building. In the case of a triplex, BSM first establishes which two of the owner-occupants have lived in the building as owners continuously for the longest, and focuses on the one of these with the shortest duration of owner-occupancy. The agency then determines 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 counts the number of years in which the building has lost, and that number establishes the number of Pool B tickets given to the building. Similarly, in the case of a four-plex, BSM first establishes which three of the owner-occupants have lived in the building as owners continuously for the longest, and focuses on the one of these with the shortest duration of owner-occupancy.

It is important not to overestimate the significance of the number of Pool B tickets a building obtains. There are so many Pool B tickets that the chance of any particular ticket being selected are very low. Consequently, the increase in odds based on having more Pool B tickets is statistically insignificant. This fact is illustrated by the results of the 2009 and 2010 conversion lotteries, where there were just as many or more Pool B winners among buildings that had less seniority and fewer tickets.

How difficult will it be, and how long will it take, to win the condominium conversion lottery when it resumes in 2024 or 2025?

As noted above, San Francisco’s condo lotto has been suspended for 10-12 years, and will return in 2024 or 2024. (The exact year the lottery will resume depends on how many buildings convert under the temporary lottery bypass/amnesty program and other related factors.) When the lottery restarts, there will be three significant changes in lottery eligibility: first, 5-6 unit buildings will no longer qualify for condo conversion; second, the number of owner-occupants required to qualify a three unit building to convert will have increased from one to two, and the number of owner-occupants required to qualify a four unit building to convert will have increased from one to three; and third, buildings that have had a “no fault” eviction (such as an eviction for owner-occupancy, relative occupancy, renovation, or the Ellis Act) within the preceding seven years will not be eligible.

While each of these three changes will significantly diminish the number of properties that will qualify to enter the condo lottery, there is likely to be a backlog of eligible 2-4 unit buildings that has built up during the 10-12 years the lottery has been suspended. Based on past statistics, we estimate that there will by approximately 400 buildings in this group.

Of the group of buildings entering the first post-suspension lottery, few will qualify for Pool A. That is because the vast majority of buildings that had been participating in the lottery before its suspension will have converted under the lottery bypass/amnesty, and most of those that did not will have lost their pre-suspension owner-occupants. It is therefor likely that all of the buildings that have accumulated three or more lottery losses, and have managed to keep their pre-2014 owner-occupants, (probably no more than 3-5 buildings), will win in the first year of the lottery. Everyone else will be in Pool B, and will have only one ticket, meaning the playing field will be level for all these entrants. Since approximately 60 buildings will win in an average year with no 5-6 unit lottery participants, this would put the odds of winning for these buildings at approximately 60 in 400, or 15%.

 


About the Author

SirkinLaw APC 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. 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 Cam, Andy, or attorney Rosemarie MacGuiness, 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.