TIC Corner
D. Andrew Sirkin
Q. What is the significance of the Supervisors' recent disapproval of a condo conversion?
A. On May 17, the San Francisco Board of Supervisors' for the first time ever, blocked condominium conversion of a lottery-winning six-unit building. Tenant groups have touted this decision as a watershed in their ongoing campaign to discourage tenancy-in-common formations. Board President Aaron Peskin—who single-handedly advocated the denial—has said he will push the board to take similar actions in the future. But the true significance of the board's move is far from clear due to the peculiar history of the building refused conversion, the complexity of the law cited by the board as the basis for its act, and the strange and secretive manner in which the matter was brought before the board.
San Francisco Subdivision Code Section 1386 states:
“When the City Planning Commission determines that vacancies in the project have been increased, or elderly or permanently disabled tenants displaced or discriminated against in leasing units, or evictions have occurred for the purpose of preparing the building for conversion, or if rents in the project over the previous 18 months preceding the date of filing the application have been increased substantially greater than any increase in the residential rent component of the ‘Bay Area Cost of Living Index U.S. Dept. of Labor,' (except for increases reasonably related to construction of Code-required capital improvements directly related to Code enforcement, or to recoup the costs thereof), or when the City Planning Commission determines that the subdivider has knowingly submitted incorrect information (to mislead or misdirect efforts by agencies of the City and County of San Francisco in the administration of this Code), the Tentative Map shall be disapproved and the subdivider may not reapply for 18 months from the date of denial. In evaluation of the current vacancy level under this Section, the increase in rental rates for each unit over the preceding five years and the average monthly vacancy rate for the project over the preceding three years shall be considered. In the evaluation of displacement of elderly tenants any such displacements over the preceding three years, and the reasons therefore, shall be considered.”
In somewhat rambling fashion, San Francisco Subdivision Code Section 1386 gives the Planning Commission the power to deny conversion for the following reasons: (i) “vacancies in the project have been increased…,” “based on rental rates…over the preceding five years and…vacancy rate over the preceding three years”; (ii) “elderly or permanently disabled tenants [have been] displaced or discriminated against in leasing units…” “over the preceding three years”; (iii) “evictions have occurred for the purpose of preparing the building for conversion” (with no particular time frame referenced); (iv) “rents in the project over the previous 18 months…have been increased substantially”; and (v) “the subdivider has knowingly submitted incorrect information (to mislead or misdirect efforts by agencies of the City and County of San Francisco in the administration of this Code).” (View the full text of Section 1386 at www.andysirkin.com.)
To allow the Planning Commission to use this power, conversion applications must include a five-year rental history and a statement (under penalty of perjury) identifying any elderly or disabled tenants who have resided in the building within the previous three years. This material is reviewed by a Planning-Department employee on behalf of the Commission and, historically, it has always been the planner (rather than the Planning Commission or the Board of Supervisors) who has decided whether an application should be denied based on Section 1386. In fact, two-to-four-unit conversions are not brought before either the Commission or the Board of Supervisors, and conversions of five-six unit buildings have always been placed on the “Consent Calendar” of both bodies, meaning that no testimony is taken and neither the owners nor their attorney(s) attend the hearings.
The building subject to the board's recent decision had a particularly complex and confusing eviction and application history. The only elderly or disabled tenant who had lived in the building during the three years preceding application had died while in occupancy. An Ellis-Act eviction had been commenced but later withdrawn after a monetary settlement was reached, a procedure which was legal at the time (but has subsequently been prohibited by a new law). Only some of the owner-occupants who applied for conversion were aware of this history (most had purchased after the building was empty), and as a result of poor communication with the group the application listed the reason for some of the tenants' departures as “unknown.” This error was discovered during the application process and corrected with an amended application to the satisfaction of both Planning Department staff and the Department of Public Works.
For reasons that remain unclear, the conversion was scheduled for a full hearing before the Planning Commission. This is the only instance I know of in the 16 years I have been involved in San Francisco condo conversions that a conversion was scheduled for a hearing. Fortunately, the owners and their attorney were informed of the hearing and had the opportunity to present the background to the Commission. After hearing the full eviction history and reviewing the amended application, the Commission approved the conversion.
Nearly two years later, without notifying either the owners or their attorney of his plans, Supervisor Aaron Peskin asked the full board to overturn the Planning Commission and disallow the conversion. Notwithstanding the complex historical background of the rental history and conversion application, the difficulty in unraveling Section 1386, the years of waiting and tens of thousands of dollars invested by the owners in the conversion, the board's consideration of the matter lasted less than three minutes. Supervisor Peskin told the board that the owners had at best misled and at worst had lied in their application, and that had the Planning Commission known the truth it would certainly have disapproved the conversion.
Not surprisingly, the supervisors' decision appeared on the Tenants Union and ultra left BeyondChron Web sites within hours (implying someone knew about the hearing in advance), where Tenants Union capo Ted Gullickson was quoted as saying “they (the owners? the capitalists? the supervisors?) never knew what hit them.” True enough. Supervisor Peskin told the Examiner “the law is the law is the law,” but he apparently didn't mean the part about due process, notice and the opportunity to be heard.
While there is little doubt that the board's decision will be reversed either by the supervisors themselves or by the courts, the impact of the decision on future conversions and the TIC market is unknown. As mentioned above, Section 1386 addresses both the falsification of a conversion application and the rental history of the building. If the board action signals a tougher stance on falsified applications, it will have little long-term effect. But if the board action signals closer scrutiny of rental/eviction history or, as Gullickson asserts, that buildings from which tenants have been evicted will no longer be allowed to convert, the long-term effect on future conversions and the TIC market could be profound.
The true significance of the vote will not be known unless and until the Planning Commission or Board of Supervisors considers denying a conversion application based purely on eviction history. At that time, and when the resulting decision is reviewed by the courts, many of the open questions raised by Section 1386 will be answered. These questions include: (i) does Section 1386 apply to all conversions or only those of five-plus unit buildings? (ii) how many years prior to the conversion are relevant from an eviction perspective, and will it matter whether an eviction was undertaken by the applicant owners or by prior owners? (iii) will evictions undertaken to prepare a building for owner-occupancy be considered a basis for disapproval and, if so, will the age and disability status of the tenant be important? (iv) will tenant buyouts be considered equivalent to evictions for the purpose of conversion eligibility?
Until the intentions of the Planning Commission and Board of Supervisors become clear, and until the meaning of Section 1386 is interpreted by those bodies and by the courts, the practical effect of the recent board decision will be to create slightly more uncertainty in the already uncertain world of San Francisco condominium conversions. But given the incredibly poor odds of winning the condominium lottery, conversion should not be the basis for any purchase regardless of the outcome of the Section 1386 debate. Assuming TIC buyers understand or are properly educated about the odds against conversion in general, the board decision should not significantly affect their buying decisions.
Author's Postscript: On June 7, the Board overturned its decision and reinstated the conversion. Only Supervisor Daly voted against reinstatement.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. More detailed information on this topic is available online at www.andysirkin.com. Sirkin's law practice is devoted exclusively to tenancy-in-common, vacation home-sharing, equity sharing, investment partnerships and other co-ownership matters. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.