Current Developments

Subleasing Developments:  Vacation Rentals; Children as Original Occupants

Changing social mores, the internet, social media and skyrocketing rental rates have probably all contributed to the growth of people renting out their homes and apartments to
tourists. While Landlords might understand the impetus for such activity, most would prefer not to have tenants renting their units to strangers on a short term basis. They obtain no financial benefit from the activity and yet remain responsible if there are any adverse consequences from a vacation rental. These could include: security risks (no one has done a background check on such visitors, visitors will have keys to all doors, there is no check on having all keys returned); behavior issues; and unintended consequences such as bedbugs or other critters brought in by the travelers.

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Short Term Rentals are a Wave of the Future

Utrecht & Lenvin partner Paul Utrecht was quoted in a May 28, 2013 Financial Times article regarding legal and political issues raised by the proliferation of short term vacation rentals in San Francisco.  Mr. Utrecht expressed the opinion that short term vacation rental companies like Airbnb and VRBO are a positive force in the San Francisco real estate economy, but should be regulated and taxed.  Click here to see the article.  Apartment rentals for less than a month are increasingly common as a result of services like Airbnb and VRBO.  Mr. Utrecht was interviewed for the article because of our firm’s significant knowledge of and experience in dealing with the issues raised by short-term rentals, for both owners and tenants.  The firm is also actively monitoring political developments in San Francisco that currently include proposals to legalize some types of short-term rentals.

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Proposed New Rules for Condo Conversion:
Great News for Some and Dreadful News for Others

For several years, Supervisors Mark Farrell and Scott Wiener have been working with Plan C to provide some relief for TIC owners who have been waiting in the lottery for years to convert their units to condominiums.  The basic idea was to give TIC owners the option to bypass the lottery by paying a fee and granting a lifetime lease to any existing tenants.  Otherwise, the existing system governing condominium conversion was left untouched, so both current TIC owners and future TIC owners would be allowed to participate in the lottery as it has existed since the 1980s.

David Chiu, President of the Board of Supervisors, just introduced amendments to the proposed ordinance that provide some benefits to a few TIC owners, but otherwise completely changes the rules for all TIC owners.  Although presented as a compromise measure, the amendments have created such onerous consequences for TIC owners that the two sponsors, Supervisors Farrell and Wiener, have announced that they will vote no on the legislation that they sponsored.  Unfortunately, it appears that the proposed ordinance has majority support on the Board. The proposed ordinance contains good features for some existing TIC owners, bad features for others, and dreadful consequences for all future TIC owners and for the City as a whole.

The good
The good provisions for current TIC owners are as follows: No more lottery for those TIC owners who qualify and certainty about when they will be able to convert their units to condos. Every TIC owner who participated in the lottery will be able to convert in the next two years by paying a fee ranging from $20,000 to $4,000 (the fee declines based on the number of years the owner lost in the lottery). All other qualifying TIC owners will be allowed to convert over the next six years by paying the fee. To qualify, the owners must prove continuous occupancy for six years by one owner in a two, three or four-unit building or three owners in a five or six-unit building. That occupancy must have started on or before April 15, 2012. And, there must be a TIC agreement establishing each owner’s exclusive right of occupancy of a unit—satisfied by the typical TIC agreements—in place on or before April 15, 2013.  Even the good part are tempered with a dollop of badness:  TIC owners who want to convert must offer lifetime leases to existing tenants and pay the conversion fee, if they do not, then they will have to wait 10 to 20 years until the lottery resumes.

The bad
The bad provisions for current TIC owners are as follows: Existing TIC owners who don’t qualify won’t be allowed to convert for the next 10 to 20 years—more on this later. If there are any tenants in the building at the time of conversion, they must be offered a lifetime lease on a City-approved lease form. Not only are the leases for the lifetime of the tenant, but also for the life of any occupant related to the lifetime tenant and over the age of 62, disabled or catastrophically ill when the tenant under the lifetime lease dies or voluntarily vacates. If any tenants are evicted after March 31, 2013 for no-fault reasons, for example, owner move-in, Ellis, etc., then the owners will not be able to convert. Lastly, all condo conversion applications will be subject to public review and protest requiring a public hearing at which neighbors, former tenants, and other members of the public can dispute the conversion.

. . . and the terrible
Here are the bad provisions for future TIC owners: No more conversions of five-unit and six-unit buildings. Increased occupancy requirements:  three years of continuous occupancy by two owners in a three-unit building and three owners in a four-unit building.

The worst provision for the city and future TIC owners: The suspension of the lottery for at least 10 years and possibly as long as 20. Under the current regime, all owners (and prospective owners) of TICs have a reasonable expectation that they will have a chance to convert to condos under the lottery after three years of owner-occupancy. Those chances have grown slimmer as more owners participated in the lottery over the years, but the chance certainly existed. Now, anyone who moved into a TIC after April 15, 2011 or moves in in the future, will know that they cannot condo convert until some time between 2021 and 2031.

The last wrinkle in the proposal is that these provisions are suspended while any lawsuits challenging the ordinance (or any one tenant’s lifetime lease granted by it) are pending. In other words, if anyone decides to challenge the ordinance, it will be suspended for a period of years.  That means that even for the TIC owners who stand to benefit from the proposed ordinance, much of that benefit may be eliminated during the time it takes to resolve the law suits challenging the ordinance.

This proposed ordinance is a classic example of bad public policy for land use decisions in San Francisco.  The ordinance provides some benefits to existing TIC owners while punishing all future TIC owners.  The Board, like King Canute, who ordered the waves to stop, may think that it can prevent TICs by punishing the owners.  But, like the waves, the public demand for home ownership will inevitably result in the conversion of apartment buildings into owner occupied buildings.  Instead, of commanding the economic market to stop, the City should be regulating the orderly conversion of apartment buildings from apartments to condominiums in a way that respects the rights of owners and tenants.  This ordinance will simply result in more evictions and more TICs.