How Much is Condo Conversion Worth?

Several unoccupied 2-unit buildings are on the market as TICs. A 2-unit building means you can avoid the condo lottery circus. In theory, these units could be condominiums within five years. Should the sale price of these listings be equal to that of comparable condominiums? I don't think so, especially in this declining market.

480 Valley Street at Castro
Contemporary (ie charmless), located at the upper edge of Noe Valley. Upper 2BR $785,000, lower 2BR $775,000.

54 Fair Avenue
Standard issue Bernal with usual Bernal views. Upper 1 BR $474,00, lower 2 BR $625,000.

2132-34 24th Street
Lovely Potrero building with verdant garden. But "great freeway access" means you are two blocks from the roar of the 101. Upper 2 BR $849,000, lower 1 BR $649,000.

Insurance Primer

One of the things new TIC groups need to consider is insurance. This is another one of the not so-little-details of home ownership that new buyers might have little experience with.

There is no avoiding insurance. Your mortgage holder will require it. They are carrying the loan, and if your building burns down to the ground they want to be reasonably sure the property gets rebuilt so there is something of equivalent value sitting on your land.

That said, you are on the hook for the morgage whether or not the insurance company pays up. (Just ask all those folks down in Louisiana who are still litigating with their insurance companies after hurricane Katrina.)

So you are going to have to figure out how to get an insurance policy, and what is the best policy your group can afford. You will need to weigh the risks of your building's condition and location with the costs of the insurance coverage. For example, in a serious earthquake much of the land in the Marina has an increased probability of liquefaction. (As it sounds - the soil beneath the foundation liquifies.) If you are in a building constructed before the 1950s, you may have a brick foundation with disintegrating mortar that will is susceptible to a shake. Or you may have purchased newer construction where there is an unbraced parking garage beneath the residences, elevating the chances of a structural collapse.

This all sounds very doomsday, but this is exactly what insurance carriers are analyzing and hedging against. It is a business after all. They are betting, even in the event of a disaster, that they can take in more money than they wil need to pay out.

It is generally more difficult to get a good homeowner's insurance policy if you are in a TIC. One agent told me insurers don't like TICs because they must negotiate (and perhaps fight) claims with multiple parties on the same property. And if you are in a TIC with more than four units your building is considered a commercial, not residential, property so your options for insurance will be reduced further.

The devils are in the details. You need to read your policy. And you need to ask questions.

Here are some things to inquire about before you sign on the dotted line:

How long does this policy cover the carrying costs I will need to pay if I need to relocate due to building damage?

How long will it take the company to evaluate and pay a significant (over $10,000) claim?

What, specifically, are the exclusions in this insurance contract? (Earthquake, flood, mold, earth movement, and "wear and tear" are some of the perils that are usually excluded.)

And remember in most cases your TIC building policy does not cover the contents of your unit. Each member of the TIC will also need to consider the benefit of obtaining an individual policy for the replacement of furniture, electronics, jewelry and other personal possessions.

1890 Jefferson

With fractional loans, TICs with more than six units are becoming more common. Circle Bank, after testing the water with smaller projects, is stepping things up with larger multi-unit dwellings. This new release features nine units in a prime Marina location.

Apparently four units are open this weekend; the rest of the building is still being renovated. (This explains the "reservation to purchase" statement. They are probably skittish about missing the fall sales window.)

Interestingly enough, this property is not on the MLS. When I phoned the realtor said she wants to work with principals (aka buyers) only. In other words - buyers with no agents.

Given that sellers usually pay all realtors' fees, that means prospective buyers should make sure the seller's agent is not double dipping on commission. (Without a buyer's agent to split commission with, the seller's agent should only be getting about 2-3% commission and passing a 2-3% savings on to the buyer.)

It also means buyers are on their own when it comes to due diligence, including pre-sale property inspections, assessing the market worth versus the asking price, negotiating the sales price, asking for concessions (like parking at no additional cost) and other mission critical items. In other words, if you are a first time buyer, or someone who isn't well-versed in the San Francisco market, you could be in for a a bit of a ride. It's not impossible to buy or sell your own property in San Francisco if you know the drill. But one should never expect a seller's agent to be working in a buyer's best interest.

Pardon the Rant

Election season is upon us. This morning I returned home after doing some errands and found a bunch of postcards stuffed under our gate. The headline on the postcard, which appeared next to a photograph of an elderly woman with a distressed expression, read "YES ON PROP H PROTECTS OUR MOST VULNERABLE RENTERS." The copy went on to proclaim "Thousands are evicted in San Francisco for no-fault evictions each year."

This is a lie. According to the statistics posted by the San Francisco Rent Board, there were 1,621 eviction notices filed with the City between March 2005 and February 2006. Out of that total, those that could be considered "no fault" include:

259 owner or relative move-in
51 demolish or remove from housing use
97 capital improvement work
276 Ellis (withdrawal of unit)

That equals 683. That is not thousands.

(As a sidebar, one must note 259 of those people were forced to serve leaseholders with an eviction notice in order to regain possession of homes that belonged to them.)

The same type of people who would march down Market Street bearing banners proclaiming that Bush lied are pushing these postcards under my door. I realize that political advertising needs to be compelling and persuasive. Why must it be utterly dishonest?

A Primer on Reserves

One of the things new TIC owners need to consider is reserves. A newly formed TIC will most likely have no reserves, and the cost of funding this account can be significant. It's a hidden startup cost, which you won't usually see listed on the data sheets handed out by realtors.

Anyone who buys a property is aware that upon purchase they assume responsibility for maintenance. But there is a difference between buying a stand alone home where you are the sole title holder and a TIC where you share title with a group. If you own a "stand alone" home, you make the decisions regarding how much (or how little) is kept in your rainy day account, and you determine how that money is held - in a savings account, in stocks and bonds, or stuffed underneath your mattress. If you are a new buyer of a stand alone home you have the option of breaking the piggyback to make a down payment, putting up with some peeling paint and crossing your fingers that the roof doesn't cave in while you defer maintenance and take a few years to replenish your savings. If you are in a TIC, these decisions no longer belong to you alone, and neither does your money once you put it into the group reserves.

The amount of reserves a TIC group must maintain is often outlined in the TIC agreement, the legal document everyone in the group signs detailing the rules of the group's engagement. TIC reserves typically consist of two parts: money to cover projected building maintenance and money to cover the mortgage, taxes and insurance if someone in the group defaults on his or her monthly obligation.

To determine the maintenance portion, it helps to have someone in your group who is has knowledge about building repair costs and someone who is fluent in a spreadsheet program like Excel. You will need to list every component of the common area (roof, siding, exterior paint, interior hall paint, fences and so on), and determine how long it might be before these components need to be repaired or replaced. Then you will need to estimate what it might cost to repair or replace them when their "useful life" expires. (Don't forget the sidewalks. In San Francisco everything to curb line is a property owner's responsibility.) Most TIC agreements require that this forecast looks out 15 years ahead.

For example:

Roof
Useful life=10 years
Estimated replacement cost in 10 years=$10,000
Total annual roof reserves=$1,000

Exterior Paint
Useful life=5 years
Estimated repainting in 5 years=$20,000
Total annual exterior paint reserves=$4,000

Hot Water Heaters
Useful life=7 years
Estimated replacement cost in 7 years=$2,000
Total annual hot water heater reserves=$286

And so on. The group must agree on all of these numbers - no small feat in itself. Then the total costs of all the projected maintenance are split based on the percentage of interest each owner has in the building. If your total projected maintenance costs end up being $30,000, and you own 25% of the building, the amount you must add to the reserves will be $7,500.

The second "default" portion of reserves is make good money. It covers the amount of money the group would have to pay IF you walked away from your mortgage, taxes and insurance. (This is required ONLY if the TIC is financed by a group loan. In buildings with fractional loans, owners do not have to add this additional cash to the group account.) In most instances this is equal to two months of principal, interest, taxes and insurance. On a $300,000 loan at 7% that might be about $6,000.

In this fictional scenario, if you were the buyer, within the first two months of buying a new TIC, you would need to put $13,500 into the house account. (No small potatoes for most people to come up with so quickly after making the down payment.) Also, once that money goes into the house account it no longer belongs to you. If you get transferred to Cincinnati six months later and need sell, there is usually no way to get that money back. If you can't make it up on the sale price you've lost it.

This is why my group keeps relatively low reserves, and relies more heavily on special assessments for repairs. After nearly seven years of co-ownership we know and trust each other. We have an understanding that each owner will maintain enough money in our personal accounts to make up for the amount we are not putting into reserves. But I would not recommend this approach for everyone, particularly new groups that need to establish a history of responsibility.

What This City Really Needs

What this city really needs is housing in the $250,000 range for singles, downsizers, and young couples who don't mind living in somewhat tight quarters. Imagine how the city would change if anyone who wanted one could buy a decent place with $25,000 down and a $1,315 monthly mortgage.

(The Mayor's Office of Housing sure isn't making much progress in providing "below market rate" homes.)

Might this become possible if buildings with more than six units could be converted to TIC, stock cooperatives, or condos?

Giving up high minded free market idealism for the moment, let's imagine the City introduced a program that allowed 6+ buildings to be subdivided and sold as individual units. Tenants would be given first option to purchase, and units 1000 square feet or less would be capped at $250,000.

Temporary Urban Parks

I was strolling around my neighborhood today and happened on the Linden Street Sidewalk Sale, which is part art party, part neighborhood activism, part concert. This fair has been happening for 16 years, but this is the first to make great use of the Hayes Green, a little stretch of park off Hayes Street that accompanied the Octavia Boulevard freeway access project.

A little bit of green can go a long way in helping to strengthen a neighborhood. So I'd like to send some kudos to Rebar for organizing this imaginative and conceptual landscape architecture happening. Join in.

Remake, Remodel

Back in the day, a group of eager homeowners could buy a multi-unit TIC fixer upper for a reasonable price and years later their sweat equity would pay off. That was one of the great things about TIC opportunities. People could band together, pool their resources, and over the course of a few years rehabilitate a building that had been neglected as a rental property.

Today even a four-unit building like this which has a $60,000 pest report and requires substantial foundation work under difficult space constraints costs nearly a million dollars. A friend of mine who has rehabilitated several buildings in the City said that it could cost as much as $300,000 to repair 372 Lily. For non-professionals the cost would likely be significantly higher - let's say an additional $100,000. So in this case for a total cost of $1,320,000 each owner would end up spending $330,000, not counting the carrying costs while all work was being done. Not bad in this market, but not so great either, considering the blood, sweat and tears.

What It Might Cost the City

If TIC loan rates fall into line with condominium loan rates, what might that cost the City?

Let's assume there are 750 TIC buildings in the City, and they all decide to get fractional loans and forget about condo conversion.

750 buildings will no longer spend $150 on condo lottery tickets. The City loses $112,500.

750 buildings will no longer spend $600 (on average) getting condo conversion inspections. The City loses $450,000.

750 buildings will no longer spend $8,400 (on average) in condo conversion application fees. The City loses $6,300,000.

The City is going to lose about $6,862,500.

This doesn't include the additional property tax revenue that results when a TIC building converts to condos and an owner sells at the higher market rate currently ascribed to condos. The difference between TIC and condo valuation might evaporate if fractional financing comes into alignment with condo financing.

(This calculation was inspired by a conversation I had in the hall this afternoon with the owner of unit number 2.)

Rooms with a View

247A Henry Street is a smallish top floor railroad flat in a 6 unit building. Aside from a vintage kitchen with a wonderful Wedgewood stove, finishes are ho hum but what a great location and what a lovely view from your sunroom and little back deck. With a little imagination this could be a pretty groovy "romeo" pad.

Unfortunately the realtor is not offering fractional loans, which may be why four units are still vacant even though the property has been on the market since last May.

Also, the group loan rate being offered is 7.5%. If the group loan rates are that high, the price should be lower. After all, the buyer is taking on more risk with a group loan, and sacrificing potential liquidity if the property appreciates. And if the buyer is qualified there is no reason he or she should pay a premium that results in a $3000/month payment, which is about what you would have to shell out based on the $419,000 asking price. (Oh, excuse me. $2309.65 after taxes.)

I mean, this is a building for first time buyers. The kind of buyers who might just as well rent a more or less equivalent space for $1500 a month.

I bet you could hard bargain way down on this one.

Another Quick Calculation

There were 330 Ellis Act Evictions in San Francisco in 2005.

There are 214,309 rental units in the City.

So the odds of getting thrown out of an apartment due to an Ellis eviction are .00154%.

In terms of urban hazards, I wonder how that compares to the odds of being hit by a MUNI bus.

More Ellis Act Spin

Distict 5 Supervisor Russ Mirkarimi featured this item in his recent newsletter:

"San Francisco's limited stock of rental housing is being threatened by yet another speculator-driven set of Ellis Act evictions. 1530 McAllister Street is a seven-unit building, and the current tenants reflect the diversity of the City: the building is home to singles, couples, babies, children, disabled seniors, and transgendered folks. Tenants include an 89-year-old African-American woman, a 68-year-old retiree who has lived in building for 25 years, and a family with a five-week-old baby. On July 27th Supervisor Mirkarimi joined tenants, activists, the Senior Action Network, the Tenderloin Housing Clinic, and others in a demonstration and protest at the offices of the realtors in question."

Like any civilized person, I do not feel like cheering when I am handed an image that depicts 90-year-old women and five-week-old babies being thrown helplessly to the curb.

Still, I find this kind of rhetoric specious and self-serving. It implies there is a cause and effect relationship between the Ellis Act and inhumane treatment of the weak and elderly in San Francisco. It also suggests the inverse - get rid of the Ellis Act and our babies and grandmothers will be safe in their homes. It uses these false presumptions to present our District 5 Supervisor in a heroic light.

I would rather see our Supervisor make the connection between home ownership and security, and advocate to increase home ownership opportunities for all classes of people in the City.

I would prefer he make it clear that if the people of San Francisco believe it is right and humane to provide affordable housing for certain classes of people, like the elderly and the economically disenfranchised, then all residents of the city should be willing to bear the cost. No property owner (even one with speculative tendencies) should be obligated to provide shelter to anyone, including a grandmother or a baby or a person with AIDS, throughout their entire lives. Owning rental property is a business, not a philanthropy.

As Judge Janice Rogers Brown, in her dissenting opinion in the San Remo Hotel case wrote:

"...it might be perfectly legitimate for the City to help the low-income residents of San Francisco, but it may not do so at the expense of some small class of persons simply by legislating a transfer of property rights. Of course, providing assistance to low-income residents of the community incrementally benefits all members of the community both by removing the blight of homelessness and by representing a general moral good, but here the burden of this common benefit falls disproportionately on 500 business owners in a city of 776,700 residents."

The Money Pot

I just did a quick calculation.

If you figure the average TIC in the City is priced at $500,000, then $120 million in mortgage money only finances 240 units.

1652 units lost the condo lottery last year.

That means there is $826 million in opportunity out there.

Come on, people. Ramp up those TIC loan programs.

More Fractional Loan Options

TIC owners interested in fractional financing should be aware that they now have several options.

This is good, because Circle Bank, the first to offer fractional loans directly to TIC owners, apparently has a backlog of applications.

Here is the list:

BANKS
American California Bank
Katherine Summer
415-217-4771

Circle Bank
Mark Skolnick
415-893-7701

Sterling Bank
Brandon Frey
415-970-9889 x512
(Currently only handles buildings with a maximum of 4 TIC units.)

Bank of Marin
(Only offers loans through selected developers of new TIC properties.)


BROKERS
Integrated Mortgage
866-462-3279
(Although several other brokers in the city handle TIC loans, Integrated apparently has an exclusive relationship with some big capital providers.)


Options should continue to expand. I have been told that as much as $120 million will become available in new TIC loan programs over the next few months.

Hopefully we will also see rates improve. After all, there is no basis for charging an extra point for TIC money. I have no hard facts to back up my assumption, but I am guessing TIC loans are no riskier than any other residential debt. Why should they cost us more?

Winning

After a day obsessing about condo lottery odds, I realized I've already won the lottery. I've been living in my TIC building happily for nearly seven years. My partners and I genuinely enjoy each other's company. We care about each other as people and we work well together as a team managing the building. Hell, who knows. We might all end up growing old together here.

Condo Permit Odds Toughen

A story in today's Examiner analyzes the results of the 2006 lottery. The most interesting aspect of this story is that it reveals the number of years all entrants had waited as of 2006. Based on these numbers, you can figure out more or less where you stand with regard to future odds, should the lottery continue favoring the most senior entrants.

2006 Lottery Winners
7 years - 1 building, 3 units
6 years - 22 buildings, 75 units
5 years - 8 buildings, 28 units
4 years - 6 buildings, 18 units
3 years - 11 buildings, 35 units
2 years - 6 buildings, 19 units
1 year - 7 buildings, 22 units

Total: 61 buildings, 200 units


2006 Lottery Losers
5 years - 24 buildings, 80 units
4 years - 57 buildings, 178 units
3 years - 108 buildings, 335 units
2 years - 111 buildings, 342 units
1 year - 175 buildings, 513 units

Total: 537 buildings, 1652 units

Thievery Mystery

Someone has been stealing our laundry soap.

Three of the units in our six unit building have washer/dryers. The other three units share a common laundry downstairs in a partially sheltered area in the alley behind our house. It's a bit of a jerry rig that was installed several years ago by the three owners who needed laundry. It's worked well enough for the past few years so there has never been a movement to change it.

But since early June the laundry has been attracting intruders. Some one or some thing has been sneaking into the back area, washing and drying clothes, and making off with our bottles of Cheer and Tide.

We posted a warning sign. One week later we found the alley door open, a pair of women's sneakers near the washer and cigarette butts in the dryer. This evidence of an escalating invasion mobilized everyone in the building.

The owner of Unit 3 flagged down a passing patrol car. Two nice officers politely informed us that even if they caught the perpetrator red-handed, there would be little they could do. "We'd just write a ticket. The DA," said the cops, "would never hold someone for this."

The cops inspected the area, and suggested that our next door neighbors might be the prime suspects. The building next door is filled with 20-something renters, who try to beat the cost of city living by jamming three or four people into one unit. One cop showed us how easy it would be to climb from the next door landing onto the roof of our laundry shed and drop down to the ground. (Heartening to see there are still cops in the city who can exhibit such athleticism.) They advised us to "beef up on security" and defend ourselves.

Filled with angst and venom, we asked about installing barbed wire or some other kind of malicious barrier.

"Don't," they cautioned, "It's crazy but if someone ends up getting hurt climbing over a fence like that while trespassing on your property they can sue you for their injuries."

After discussing a myriad of possibilities, the next weekend we blocked off the back of the roof with a high trellis and two pots of heavily thorned bougainvillea. To test the success of the barrier, we put out a water-filled Cheer bottle as bait. We're all watching and waiting.

This is just one example of the kind of unforseen event that comes up in a center City group ownership situation.

Rising Tide

According to the San Francisco MLS, there are 257 TIC units for sale in the City. Buyers market indeed.

4 Bedrooms, No Parking

This six-unit TIC near Duboce Park lives up to the hyperbole of the realtor's statement: spacious, elegant, soaring ceilings, period details, remodelled kitchens and baths, terrific tree-lined street.

So why, after 88 days, are all six units still on the market?

My answer would be no parking, high price and the unattractive mortgage rates that go with fractional TIC financing.

When asked about leased parking nearby, the realtor could only offer the vaguest of reassurances about finding a garage somewhere in the area.

My guess is that in the $699,000 price range, city buyers would rather give up the extra square footage and go for a two bedroom condo with parking. Let's face it. Most of the higher paying private sector jobs are in the South Bay, and people have to commute. Nothing like circling the block for half an hour after a full day's work and an hour plus drive.

And while you are checking out that condo, you will find loan rates are a full point lower than what TIC fractionals have to offer.

Also, when a building has this many units, all more or less equally attractive, mirroring each other in terms of layouts and features, no buyer in this market wants to be the first to offer list price. Everyone knows that when it is down to the last unit or two the buyer is going to be eager to sell, and perhaps highly motivated to offer discounts or incentives.

I believe TICs are best targeted toward entry level buyers, or those who are looking to downsize. When prices start overlapping those in the condo zone, TICs will make less sense to a buyer. I could be wrong.

It will be interesting to see what happens at 188 Noe.

TIC Valuation

It would be great if there was a resource for existing and prospective TIC owners that published list prices versus final sales. It would be even better if details were exposed like number of units in the building, fractional financing versus group loan, whether or not the property had been in the condo lottery, and, of course, whether any evictions had occurred. These, in addition to location, square footage and amenities, are factors that impact the value of a TIC property.

Unfortunately, there is no central resource, and even pulling data from different places to get a true picture of how things are trending can be difficult.

Stirring It Up

Headlined "A Tenancy-in-Common Owner Sings the Blues," a Surreal Estate column in the Chron last August 11 focused on a Pacific Heights TIC owner. According to the story, this owner was paying an "emotional toll" for her TIC ownership. The stresses and strains included uncertainty about condo conversion after three years of ownership, and difficulties related to the fractional loan application process. The writer said after 21 months this group's refinancing - "a bureaucratic nightmare of Sisyphean proportions" - was still not complete.

After reading this, I alerted my group. If we wanted to go for a fractional loan we had better plan our strategy way in advance, and be prepared for a complicated and "unending process."

I guess I am one of the gullible few who believes most of what she reads. Someone familiar with the building recently gave me this clarification:

"The group did not really focus on getting the loan until the past 60 days. Prior to that, it was unclear to the lender whether they even wanted to refi. Their docs are now in order and they are about to close. Also, contrary to what the article said, they knew going in that their loan was only fixed for 3 years and that there was no possibility of condo converting within that time. Also, there were no individual loans available then. So, the notion that their expectations were not being fulfilled was completely fabricated to create a story. Things are actually turning out better than they could possibly have imagined when they bought the building with a 3-year fixed."

The key word here is focus. When you are working as a group, you need to rally behind a decision and march forward as one. Don't even bother getting involved with banks, contractors, insurance companies or any other vendors unless you have a quorum and an action plan.

If you have your paperwork in order, closing on a fractional loan should take about 8-10 weeks.