TIC Corner
by D. Andrew Sirkin
Q. I heard that the San Francisco Board of Supervisors passed yet another law on condominium-conversion restrictions. What are they?
A. This past spring, the San Francisco Board of Supervisors passed a new law linking a building’s eviction history to its ability to be converted to condominiums. Under the new law, a building from which an elderly or disabled tenant has been evicted since May 1, 2005, for any reason unrelated to the tenant’s behavior, can never be converted to condominiums. A tenant is considered “elderly” under this law if she is 60 or over and has resided in the building for 10 years. A tenant is considered “disabled” under this law if she would qualify as disabled under federal law.
The new law will also prohibit condominium conversion if tenants have been evicted from two or more units since May 1, 2005, for any reason unrelated to the tenants’ behavior. This rule will apply regardless of the age or disability of the tenants. But if none of the evicted tenants were elderly or disabled, the building may requalify for conversion 10 years after the last evicted tenant vacates. Requalification will occur only if the requisite number of units in the building are owner-occupied for a 10-year period. For a nonlottery conversion, this means that both units of a 2-unit building must be owner-occupied for 10 years. For a lottery conversion, this will mean that 1 unit must be owner-occupied for 10 years in a 2-4-unit building, and 3 units must be owner-occupied for 10 years in a
6-unit building.
Contrary to statements made by many politicians and the general media, the application of the new law is not limited to Ellis Act evictions. It will also apply when the eviction was based upon owner move-in, relative move-in and capital improvement/rehabilitation. Also, the law is building specific, rather than owner specific; the conversion restriction will apply even if the owner who wishes to convert the building to condominiums was not the same owner who evicted the tenant(s) and did not own any interest in the property when the tenants were evicted.
The new conversion restrictions will not apply to any building where all units were owner-occupied by separate owners on April 4, 2006. It is also inapplicable in cases where an eviction notice was served but later withdrawn, provided the tenant continued to occupy the unit for at least 120 days after the notice was withdrawn.
The measure was introduced by Supervisor Aaron Peskin, and only Supervisors Fiona Ma, Michela Alioto-Pier and Sean Elsbernd voted against passage. Tenant advocacy groups have hailed the law as a great victory for tenant’s rights, but its actual effect on evictions and the tenancy-in-common (TIC) market is likely to be minimal. Most buyers and realtors now understand that condominium conversion of any building larger than two units is extremely unlikely due to the difficulty of winning the conversion lottery. Moreover, the TIC market is rapidly shifting to buildings larger than six units, which were already ineligible for conversion. These factors indicate that current TIC demand and pricing is not influenced by the likelihood of condominium conversion, meaning that further conversion restrictions will not affect the TIC market and that owners evicting to prepare for a TIC sale will not be deterred. Owners who undertake evictions to make way for personal use, relative use or capital improvement/rehabilitation are also unlikely to be deterred by the new law, and owners who are evicting because they are no longer willing to subject themselves to the ever-increasing burden of San Francisco’s tenant “protections” are likely to be more motivated than ever to evict.
Q. I often hear about TIC arrangements involving shared usage of a vacation home or condo. Why do people do this and how does it work?
A. Vacation home co-ownership (sometimes known as fractional ownership) is an arrangement where several individuals or families co-own and share use of a vacation home or condo. Compared to owning the entire property, fractional ownership offers lower acquisition and carrying costs, and eliminates the burden and expense of renting the property when it is not being used by the owner. Compared to renting a vacation property on an as-needed basis, fractional ownership offers the emotional rewards, control and tax benefits of ownership, the potential for market appreciation and the opportunity to diversify an investment portfolio (perhaps even internationally) without taking on the burdens of a landlord.
From a seller’s perspective, selling fractional interests can often yield a higher total sale price than selling to a single buyer. In addition, fractional sales offer the possibility of retaining a partial interest so that the seller can continue to use and enjoy the property for at least part of each year.
There are two basic models for allocating usage rights. In the “usage assignment approach,” each owner is assigned the exclusive right to use the home during a specified period each year. The usage periods can be fixed (such as “the month of February” or “the first two weeks of February and July”) or variable (they are selected each year based on a rotation system adjusted for holidays and seasonal variations). During each co-owner’s assigned usage period, he or she can live in the home, allow family and friends to use it, rent it out (and keep the rental income), swap it or leave it empty. When the usage assignment approach is used, the purchase price of the home is generally shared among the co-owners based on the amount of usage allocated to each co-owner. When usage periods are permanently fixed, price allocation may also be influenced by the quality of each owner’s assigned usage dates.
The second basic model is the “pay-to-use approach.” In this arrangement, co-owners pay a pre-agreed “usage fee” for each day or week of usage. The usage fees, along with any rental income generated if the home is also rented to nonowners, are used to pay the expenses of ownership. If the usage fees and rental income together exceed the expenses, the surplus is divided among the owners; if there is a shortfall, each owner must contribute. Here again, there are a variety of methods for determining when and how often each owner will be permitted to use the home, and how usage will be allocated if two or more owners wish to use the home at the same time. When the pay-to-use approach is used, the purchase price and ownership of the home can be divided based on what each co-owner can afford, their investment goals or any other criteria the group finds useful, but purchase price and ownership need not have any relationship to usage.
There are a large number of variations and hybrids on these basic usage-rights allocation models. For example, it is possible to employ the usage assignment approach, but still allocate a certain number of weeks each year as “pay-to-use” weeks, meaning that during those times the home will be rented out to owners or to nonowners and the resulting income split among the owners in proportion to ownership. In another variation, it is possible to employ the pay-to-use approach but still give co-owners preferences or discounts for a certain number of weeks each year.
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. D. Andrew Sirkin’s law practice is devoted exclusively to tenancy-in-common, equity sharing, investment partnerships and other co-ownership matters. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.