What’s Really at Stake in SF’s Proposed Condo Conversion Plan

by Randy Shaw, 2013-02-04

Over thirty years ago, San Francisco Mayor Dianne Feinstein signed legislation limiting the conversion of rental units to condominiums to 200 per year. Feinstein was hardly a zealous tenant advocate, yet she and the Board of Supervisors recognized that eliminating rent-controlled apartments is the wrong approach to San Francisco’s housing problems. City officials also recognized that the neighborhoods where conversions of 3-6 unit buildings were most likely to occur---such as North Beach, Noe Valley, the Castro, and Haight-Ashbury---offer little space for new rental housing to be built.

Limiting condo conversions was seen as an essential tool for maintaining neighborhood economic diversity. That’s why voters and the Board have consistently refused to increase the condo conversion limit despite huge campaign spending by realtors. Now Supervisor Scott Wiener claims that the foreclosure crisis justifies circumventing the longtime 200 limit by allowing over 2000 units to “bypass” existing law; but his legislation---and the facts--- undermine this argument.

With average rents on vacant San Francisco apartments exceeding $2700 per month, it’s remarkable that the first order of business for the new Board of Supervisors is legislation to remove 2000 units from rent control and make finding a 3-6 unit rental even more difficult.

Why has a backdoor strategy to overturn Mayor Feinstein’s historic condo conversion compromise emerged now? According to Supervisor Wiener, it’s necessitated by the foreclosure crisis.

Foreclosure Fantasy

In a published letter to Beyond Chron, Wiener noted, “The legislation is designed to provide housing stability to TIC owners, many of whom are at serious risk of foreclosure. If our nation’s foreclosure crisis has reminded us of anything it’s that homeowners are not all rich – in fact, most aren’t – and that many homeowners do not have housing stability.”

But Wiener’s legislation benefits all TIC owners in the lottery, not just those facing foreclosure. And the truth is that Wiener has no idea how many of the 2000 owners are having problems paying mortgages, other than a few anecdotal cases he has come across.

Andy Sirken, an attorney specializing in TIC’s, does know the foreclosure risks for TIC owners. Sirken wrote on May 19, 2011 that "Practically speaking, although more than 5,000 of these groups have been formed, co-owner default is extremely rare, and there has been no instance of which I am aware of mortgage foreclosure on a tenancy in common group loan."

Similarly, in Zephyr Realty’s February 13, 2012 blog post, “Bright Future for TIC Lending in San Francisco,” the article notes that Sterling Bank, the chief financer of TIC’s, has found little problem with foreclosures: "TIC loans continue to perform well. Of the 800 or so fractional loans Sterling has on its books, only about eight of those loans were connected to foreclosure or a short sale.

So San Francisco’s leading TIC attorney, a real estate firm actively involved in TIC’s and the chief financier of TIC’s all contradict Wiener’s link between TIC’s and foreclosures. And a TIC lending market that was strong in 2011 and 2012 is even stronger today, undermining Wiener’s entire case for the urgency of his legislation.

Wiener’s solution to this invented TIC foreclosure “crisis” differs dramatically from programs available to single-family homeowners. These at-risk homeowners are not asking the government to change laws to sharply increase the value of their properties; to the contrary, all they want is revised payment schedules so they can stay in their homes.

Wiener’s legislation is also profoundly unfair to those who purchased condos rather than TICs, paying a higher price for comparable dwellings precisely because they did not want to deal with a condo lottery.

For example, under the legislation a purchaser of a TIC who saved $100,000-$200,000 by not buying a comparable condo dwelling will see this sudden increase in wealth by paying only $20, 000. Wiener takes umbrage at my characterization of those pushing the TIC measure as “speculators,” but what else would you call people who got a lower price by purchasing cheaper, less financially secure housing and now want to change city laws for their own private enrichment?

Wiener’s legislation is a foreclosure fantasy. It includes not a single sentence requiring TIC owners to show evidence of pending foreclosure; instead, everyone, wealthy or not, is treated the same.

Promoting Economic Segregation

San Franciscans want an economically diverse city, but this is challenging when, according to the Planning Department, 5,956 condo conversions were allowed between 2001 and 2011 (This 541 annual average exceeds the 200 limit because duplexes are exempt).

That’s 6000 fewer rental units. And their loss is disproportionately felt in desirable neighborhoods where new rental housing is rarely if ever built.

Yet proponents of Wiener’s legislation do not acknowledge this rental housing decline. In April 2012, Michael Sullivan of Plan C, which promotes condo conversions, wrote that the city had “over 200,000 rental units.” But in a January 28, 2013 letter to BeyondChron, Sullivan says “there are 330,000 rental units citywide."

If, like Sullivan and Plan C, you believe SF has added 130,000 rental units in the past nine months, it may be understandable that you find opposition to Wiener’s measure “ridiculous.” But city officials must cast votes on reality, not Plan C’s false numbers.

The real question is: who benefits from exacerbating the loss of rental opportunities and economic diversity in Noe Valley, North Beach, the Haight-Ashbury and other neighborhoods by suddenly eliminating another 2000 3-6 unit buildings from rent control (state law exempts condos, but not TICs, from rent control)? Having established that Wiener’s legislation has no provisions regarding foreclosures----and offers a solution to that crisis not available to single-family homeowners---why is such a measure even under serious consideration?

I think we know the answer. There is a financial windfall to be made by TIC owners who can now sell high after buying low, and by the real estate agents who make their commissions on sales.

You don’t see established landlord groups down at City Hall promoting this legislation, because this is not about the apartment industry. Its about a small group that thinks it can pull the wool over everyone’s eyes by identifying their cause with “foreclosures” and, as Wiener puts it, “the struggling middle class.”

The public and our elected officials should not be fooled.