Summary of San Francisco Condominium Conversion Rules
Introduction to Condominium Conversion
Condominium conversions in San Francisco have been tightly restricted since 1981. The restrictions were a reaction to a spate of large conversions in 1979-1980 that displaced many long-term tenants in large buildings on Nob Hill, Russian Hill and Pacific Heights. Under SF’s law, existing apartment or mixed-use buildings with more than six residential units cannot be converted. The conversion eligibility rules do not apply to commercial or industrial properties, or to newly-constructed buildings or newly-constructed units in existing buildings.
How to Qualify For Condo Conversion
There are currently two paths to conversion eligibility for existing buildings: (i) automatic (lottery bypass) qualification for two-unit buildings where each unit is owner-occupied by a separate owner; or (ii) the annual conversion lottery, which has been suspended but is expected to return beginning in 2024, 2025 or 2026.
Buildings with two residential units can qualify for automatic bypass conversion provided both residential units are owner-occupied by separate owners who each own at least 25% of the building and use the units as their principal residences for at least one year. Vacant units do not count as owner-occupied, and only legally separated spouses can qualify separate units. Mixed-use buildings of any size can qualify for automatic conversion if they have no more than two residential units, even if the total number of resulting condominiums (including commercial units) will be greater than two.
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.
Buildings that do not qualify under either the duplex bypass system must await the return of the conversion lottery, and then enter and win the conversion lottery. When the lottery returns, only 2-4 unit buildings permitted to enter; buildings with five or more residential units will not be eligible.
For a 2-4 unit building to enter the lottery in a particular year, all but one of the units must have been owner-occupied for the three immediately preceding years. Each qualifying owner-occupant must own at least 10% of the building, but need only be an owner at the time the building enters the lottery; he/she could have been a renter 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, which is typically in mid-January. So to qualify in 2024, the required number of owners will need to have occupied continuously since January 2021. Buildings that enter and lose must re-enter the following year, and can only do so if they continue to satisfy the owner-occupancy requirements.
Up to 200 units may be converted through the lottery each year, representing approximately 55-70 buildings (depending on the total number of dwellings in the winning buildings). The lottery is divided into two parts, each of which selects 25-35 winning buildings that, collectively, comprise 100 dwelling units. “Pool A” selects buildings that have lost the lottery at least three times, and is designed to guarantee that a building that continues to participate will eventually win. “Pool B” is open to all applicants and operates by random selection. For more information on the conversion lottery, please see the article entitled San Francisco’s Condo Conversion Lottery Priority System.
No-fault tenant evictions can affect a building’s eligibility for condominium conversion in both the duplex bypass and lottery conversion programs. A “no-fault” eviction is one not based on the tenant’s nonpayment of rent or other conduct, but rather on the desire of the owner to occupy, renovate, or withdraw the property from rental use. A no-fault eviction of an elderly (over 60 who has resided in the building for 10 years) or disabled or catastrophically ill person generally disqualifies the building from conversion under both programs. No-fault evictions of two or more tenants (regardless of age or disability) generally extends all pre-conversion owner-occupancy requirements to 10 years. And, with a few narrow exceptions, a building cannot enter the conversion lottery until eight years after its most recent no fault eviction.
A tenant buyout can affect a building’s eligibility for a lottery-based 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 eliminate or delay lottery conversion 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 completely disqualified from entering the condominium conversion lottery. If the buyout involves two or more tenants, none of whom satisfy the “protected” criteria described in the preceding sentence, then the normal three-year owner-occupancy duration requirement for conversion lottery entry is extended to 10 years.
Learn more about the effect of evictions and buyouts in the article entitled The Effect of Eviction and Tenant Buyout History on Condominium Conversion Eligibility.
Condominium Conversion Building Inspection and Building Code Compliance
After a building qualifies for conversion, it must submit an application package and undergo a physical inspection. This duration of the application and inspection process varies depending on the number of pending applications, but has generally averaged 6-12 months. Inspection reports typically cover three types of problems: (i) work 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. Converting buildings need not meet current building codes, be seismically upgraded, or have parking.
Tenant Lifetime Leases and Purchase Rights
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.
The Cost of Condominium Conversion
Conversion costs, including application fees, attorney fees and surveying, total $20,000-25,000 (depending on building size), excluding the cost of required building repairs.
About the Author
SirkinLaw APC has been creating condominium documents, advising condominium owners, and mediating condominium association disputes, for more than 30 years. 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. Contact us via our contact form.