Supervisor's Report

Tenancies-in-common and the need for condo reform

Property taxes, home value, and financing all affect the TIC issue (photo: brad.coy / flickr)

Tenancies-in-common (TICs) play an important role in our housing stock here in San Francisco. Because they are a relatively complicated legal form of home ownership, TICs have traditionally been priced lower than comparable condominiums, offering an entry-level opportunity for homeownership for many individuals and young families. Though a majority of San Franciscans rent their homes or apartments, most are aspiring homeowners, and TICs have come to represent the most realistic path toward this goal.

Aside from the lower price point, implicit in anyone’s rationale behind purchasing a TIC is the goal of converting the TIC to a condominium. The principal effects of condo conversion are an increase in property value and greater flexibility in the financing market – both of which stem from changing the legal form of ownership from a percentage of the building (as is the case with TICs) to outright ownership of an individual unit (as is the case with condominiums).

Since 1981, conversions from TICs to condominiums have been tightly restricted in San Francisco. In reaction to a series of large conversions in 1979–1980 that displaced many long-term tenants in large buildings on Nob Hill, Russian Hill and Pacific Heights, then-Mayor Feinstein recommended legislation to allow only 200 conversions a year through a lottery system. Back then, the cap of 200 conversions was considered realistic because it covered the actual number of residential units converted in the prior two years.

Over the past decade, the condo lottery has become more and more unworkable for TIC owners. Though the 200-unit yearly limit is still in place, the number of lottery applicants has more than doubled in the past eight years, from 1,000 in 2003 to an estimated 2,500 in 2012. Currently, there are 2,392 TIC units in the system, and it is currently estimated that for TIC owners who enter the lottery in 2013, the average time it will take to win the lottery will be 19 years.

A Balancing Act

TIC owners are currently facing many of the same foreclosure and critical financial issues as other homeowners due to the recent recession. TIC owners, however, are actually worse off – most of the lenders that previously financed TICs have abandoned the TIC lending market, leaving it incredibly difficult, if not impossible, for TIC owners to take advantage of the historically low interest rates that have saved many other homeowners. The situation is particularly difficult for TICs that are under water.

Can you imagine paying 7 percent interest on a home loan in today’s market? Welcome to the nightmare many TIC owners are currently experiencing, with no escape in sight.

On June 12, I introduced legislation to reform San Francisco’s outdated and broken condo lottery. The legislation creates a one-time opportunity to bypass the condo lottery for a fee, and allows TIC owners the ability to convert their units to condos right away. Revenue from the measure, estimated at up to $25 million, will be dedicated to affordable housing, and any tenants residing in a unit converted under the legislation will receive lifetime leases, similar to what senior and disabled tenants receive under the current lottery, thereby retaining critical tenant protections. Furthermore, only buildings that are eligible for the lottery will be covered by the legislation, meaning that buildings with a problem eviction history, including Ellis Act evictions, will not be eligible.

For years, talk of condo conversion legislation has been a third rail in City Hall, as tenant activists have fought to shoot down any legislation which has the potential to remove a single rent-controlled unit off the market. Personally, I believe we need to have a more balanced approach to legislation and recognize that in order to represent all San Franciscans, we have to support both tenants and homeowners together. With this proposal, we have the opportunity to help vulnerable TIC owners who are facing significant difficulties in the financing market – in some instances paying double the interest rate of traditional borrowers – from losing their homes while protecting existing tenants, and at the same time create a large pool of money for affordable housing.

It’s without a doubt a win-win-win situation.

Supervisor Farrell represents San Francisco’s District 2. He can be reached at 415-554-7752 or [email protected].
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