By Michael J. Sullivan, of Plan C. Guest Article posted with author's permission
April 4, 2013
Annual statistics for San Francisco’s rapidly evolving real estate market recently became available – and they paint an interesting story.
San Francisco’s tight restrictions on condominium conversions have driven first time homebuyers to the more affordable tenancies in common (TICs) in recent years. TIC sales have increased every year since 2001, and 2006 continued that trend. A record 637 TICs were sold in 2006, up 17% over the previous year. This trend reflects the availability of “individual” TIC loans, in which home buyers get a separate loan, borrowing only the amount needed for their own TIC, and avoiding financial entanglement with other owners in the building. Individual TIC loans first became available in late 2005, but grew rapidly in 2006.
TICs have been criticized by some who claim that they create incentives for evictions. However, while TIC sales surged over the past year, San Francisco’s rent board reported that evictions decreased in 2006. So-called “no-fault” evictions, such as evictions under California’s Ellis Act, decreased by over 10% in 2006. Out of over 200,000 rental units in San Francisco, there were just over 500 no-fault evictions in 2006 – a reduction of almost 60% from five years ago.
San Francisco passed legislation in 2006 to disqualify condo conversions for most buildings with Ellis Act and other no-fault evictions. This was intended to discourage building owners from evicting tenants to clear buildings for TIC formations (the thinking being that if owners knew that their units could never qualify for condo conversion, they would be less likely to evict tenants in the first place). However, the reduction in evictions reported above happened before this legislation was passed — meaning that evictions were headed downward even before the punitive legislation was passed.
What these numbers together tell us is that San Franciscans are finding ways to create homeownership opportunities through TICs without evictions. That’s a very good thing for San Francisco.
The other interesting statistic is the number of participants in San Francisco’s “condo lottery”. These are the unfortunate TIC owners that attempt every year to convert their units into condominiums. (Condo status allows homeowners to own their own units, and reduces the cost, risk and complexity of homeowner loans.)
San Francisco allows only 200 units to convert to condos in the lottery annually, and the number of applicants for those 200 slots has gone up relentlessly in recent years. Whereas “only” 994 units applied in 2002, that number increased to 1,405 in 2003, to 1,512 in 2004, and to 1,652 in 2005, before hitting an all-time high of 1,736 units in 2006. If current trends continue, most applicants can expect to wait 10-12 years or more before winning the right to own their own home through the lottery process.
These statistics suggest that the real problem to be addressed in San Francisco is creating homeownership opportunities to retain our middle class. What policy goal is served by limiting condo conversions? It’s not to stop evictions — because it’s now virtually impossible to evict a building’s tenants and still qualify for condo conversion. Is it to “preserve San Francisco’s rental stock”? Even if you agree that this is a worthy goal, limiting condo conversions isn’t having that effect – building owners are converting rental units to TICs at ever-increasing levels despite the fact that condo conversion opportunities get slimmer each year.
The answer is that in this new era of easily available TICs and recently enacted eviction protections, there is no longer any good reason to limit condo conversions in San Francisco. Doing so only hurts new homeowners, and helps no one. San Francisco’s elected officials should take a bold new step and implement a much-needed housing reform: the abolition of limits on condo conversion.
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