Condo Converted

We have completed condo conversion, so this will be my goodbye post. We went through the conversion in record time for a 6-unit building, thanks to one of our building partners staying on top of everything. Of course all the people in the building were highly motivated to take advantage of the much lower mortgage rates available to condo owners, versus the very limited financing options available for TICs. Going from a 7.5% to a 3.4% rate makes a huge difference in your monthly bills.

I think the City needs to stop putting up so many barriers to condo conversion. People would rather be owners than renters, and the City would be better off with more homeowners. Homeowners pay taxes. They are committed to taking care of their homes and taking care of their neighborhoods.

The City is encouraging tech companies to return, with special tax deals and other enticements. They want these businesses back in the City. With these businesses come people who need places to live. People who would like to buy property in the City near their jobs. So San Francisco needs to complete that loop, and allow working people to fast track condo conversion.

Good luck to all of you out there who are on the journey of finding your first home in San Francisco. Don't give up. It's not easy. But this is a magical City and magical things do happen.

City Approval

So we made it through the inspections, the work to remedy the building code violations found in the inspections, the reinspections, and the search for various permits on work done long ago. We got on the Planning Commission docket, and although some "strange guy" (according to our lawyer) showed up to babble something about the evils of condo conversion, we received the tentative approval, and, yes, on paper, the final approval.

We have a couple more months of deliberations at the state level to shuffle through.

Was It Worth It?

Was it worth buying a TIC versus a condo, from a financial perspective? Over ten years ago, when I was a single woman trying to buy my first home in San Francisco, the real estate boom was just starting to heat up. I was relatively conservative and did not believe the cheerleading of the mortgage brokers who claimed I could afford a $500,000 loan. Based on my take home pay, I felt I was in a $250,000 price range. I had about $50,000 for a down payment. In other words, I was, even ten years ago, priced out of the market.

In 2010 not many buyers would touch a 6-unit TIC. The whole concept of a TIC was viewed as incredibly risky. Most realtors advised strongly against them. I just happened to be walking down the street in my neighborhood, and strolled into this building for a looky loo. At that point I was no longer trying to buy and was more or less happily resigned to being a renter. Back in 2000, a one bedroom TIC unit, in this 1910 Edwardian building, with good bones and great historic details, was listed for $250,000. It has also been a rental building for over a decade, and had not been very well maintained - by either the owner or the tenants. So it needed a huge amount of work. You had to have a good amount of imagination to see the charm in this building when it was put up for sale with its crumbling plaster, multi-layers of linoleum, decrepit, unusable fireplaces and so on. But I fell in love with this old building, and plunged naively, blissfully forward.

Looking back, all things being equal, wouldn't it have been smarter, easier and even less expensive to buy a $300,000 condo? For the condo I could have put the $50K down, and taken out a $250K loan at 6% for $1,500 a month. Instead I borrowed $200,000 at 8% interest and paid... yes, more or less the same $1,500 serving the loan. Plus I would not have incurred the thousands it cost to renovate an old house, as well as the cash I am dishing out right now to condo convert.

I think it is all about the particular property. In this case, our neighborhood went through an amazing renaissance in the past ten years, boosting property values, and keeping them high, even through a volatile economy. And while there are plenty of condos being built, there are not any more historic Edwardians, framed in old growth redwood, with all the charm of old San Francisco. So I like to think I've done all right by this old place, and it's done pretty well for me also.

The List

Some of you may think I am exaggerating about the list of things that we must do. We are a six-unit building so we do have a bunch of paperwork that needs to go to the state, as well as the City. If you have less than six units you don't need the state documentation, so your list won't be as long. Lucky us!

Title company's check-list for the state application:

A) Estimated completion dates of City inspections and necessary repair work:
1. Entire project
2. All common areas
3. Residential units

B) Legal documents from your lawyer (approved, final version for submittal to the DRE):
1. Declaration of Covenants, Conditions and Restrictions ("CC&R's")
2. Bylaws
3. Articles of Incorporation (will the Homeowners' Association be incorporated?)
4. Articles of Association (will these articles be used?)
5. Sample Contract of Sale/Purchase Agreement
6. Existing Subdivision Interest Disclosure Form (if applicable to the project)
7. Form RE 648 Check Sheet

C) All documents from engineer/surveyor:
1. Tentative Subdivision Map
2. Tentative Map Approval
3. Conditions of Approval
4. Condominium Plan (if applicable)

D) DRE submittal:
1. 3-R: Report of Residential Building Record- Please provide a copy of the most current 3-R report, Report of Residential Building Record. If not available, please obtain one from the San Francisco Department of Building Inspection.
2. Form RE 639, Supplemental Questionnaire:
Attached is a copy of the completed, executed RE Form 639. Please provide (via e-mail) the following items:
a. Items 2A1 and 2A2, Page 1 - Copies of paid invoices and cancelled checks for the work completed in June 2010 (exterior and trim painting) and March 2011 (hot water heaters) for DRE's verification purposes.
b. Item 2B, Page 1 - As the roof is 6 years old (see item 2B), please provide a roof certification completed by a licensed roofing contractor. The certification should be on the contractor's letterhead and should indicate the useful and estimated remain ing life of the roof, its present conditions and the cost to replace.
c. Item J, Page 2 - Copy of complete/entire 3-R Report - Report of Physical Inspection issued by the Department of Building Inspection, City and County of San Francisco. This report should include: electrical inspection report, plumbing inspection report, structure inspection report, etc.
d. Item L, Page 2 - Copy of Certificate of Final Completion and Occupancy issued by the Department of Building Inspection, City and County of San Francisco.
e. Item 4A, Page 4 - Copy of written notice of intention to convert and notice of tenant's first refusal.
f. Item 5, Operating Statements, Page 4 - Please provide copies of the income and expense statements for the last 3 years.

E) Complete budget package (approved, final version for submittal to the DRE, not a draft):
1. RE Form 623 HOA Budget
2. RE Form 624A HOA Common Facilities List
3. Reserve Study
4. Utility bills for the last year

Breakup Time

They say that the stress of a big home renovation can break up a marriage, and I will say that the process of a condo conversion, especially with a 6=unit building, does put a strain on the partners in a building. There are a lot of things to do, and inevitably one or two partners end up doing most of the work. Or maybe it is that even if everyone is doing some part of it, each individual starts to feel like he or she has taken on the lion's share. Someone must be home to let in the various inspectors and contractors. Someone has to make sure all the various contractors are paid in a timely fashion. Someone must organize getting the various papers notarized and walked around to different City departments. Someone must deal with documenting the building's finances, in preparation for forming a condo association. There is the title company stuff, the legal stuff... it seems like the list goes on and on.

Meanwhile, half the partners are starting to think about selling, once the conversion is done. After ten years, is it time to cash out?

Nerves start to fray. Disagreements start to happen. And yet the condo conversion deadlines keep rolling, and everyone struggles to stay polite enough to get through it all.

City Inspections: Building Department Records Search

We are in the last stages of going through the City electrical and plumbing inspections. It has taken us longer than we anticipated for two reasons. First, one of the inspectors misplaced some paperwork from his initial visit, so we had to wait for the paperwork to be completed a second time. Second, it was unclear whether one of our units had pulled appropriate permits for a kitchen and bath remodel, back in 2000. The city's online database did not show the necessary permits, so the inspector could not sign off on that unit for the condo conversion.

Luckily, the City's Building Department allows anyone to submit a form for a records search. You can download the form from the building department website, specify exactly what records you are searching for, and they will review all the microfiche, paper and electronic archives. I have to say the process was made very easy for us. After we mailed in the records search form, a clerk from the Building Department left us a voicemail message confirming they had received the request. She also stated the date when copies of any found records would be available for pickup. They charge a reasonable per page fee for making paper copies.

By great luck, the search turned up the records we needed. Without documentation of those permits and inspections, the owner of this unit would have had to open walls for the inspectors to see the plumbing and electrical work. The inspectors' job is ensuring the work is done safely, and without the documentation of the inspections, there would be no other way for them to certify the safety of the work. This work was done over ten years ago, and the unit had been sold twice over those years. So the current owner did not have any of the paperwork, and had no way of contacting the original owner.

So this leads to two pieces of advice. First, if you are part of a TIC that is able to enter the condo lottery, make sure everyone in your building is getting appropriate permits and inspections. Don't just take people at their word - get copies of the inspection sign-offs for plumbing, electrical as well as the certificate of completion. Keep these with your building records, so they are easy to find when it's time for you to go through the conversion.

Second, if the work was done years ago, and you don't have the records, take advantage of this City records search service. It could save you a lot of time and money.

Getting Ready for the City Inspectors

The City inspectors will be here early next week. We've spent about $10,000 total fixing some things that were identified by the pre-inspection as code violations. For a six-unit, 100 year old building that is a pretty reasonable amount of money.

The upcoming inspection has galvanized everyone in a positive way. We all want to address any potential safety issues with our electrical, plumbing and stairways. We've cleaned up the common areas, hauled off some junk, spiffed up our units, and given our old building a polish and sparkle.

I cannot say enough good things about our contractor, Rick Cerutti. He is smart, funny, detail-oriented, conscientious and knows the building codes. He is sensitive to the complexities (and occasional mysteries) of working on a historic building. The guys on his crew even took my neighbor's dog for a walk! So here is his contact information, if you are looking for an excellent contractor: mceruttibuilders@comcast.net.

But get in line, because after the inspection we will probably have more work to do.

City Inspection First Week of April

The group met and reviewed the pre-inspection report. Everyone worked well together and we had a very productive session. I guess after ten years living together we have figured out how to deal with each other.

One of our TIC owners is a licensed civil engineer, so that helps a great deal when reviewing building codes, and assessing what can and should be done.

We have decided to address basic things in our pre-inspection report, such as ungrounded electrical outlets, gas heater strapping, safety pans for our stoves.

We are going to wait for the City's official inspection to make decisions about bigger ticket repairs, such as replacing wall heaters, our common laundry area, opening up walls for electrical inspections and so on.

Because some of the renovations on our units took place ten years ago, the City does not appear to have complete permit records online. So we also need to either dig up paper records in our files, or try to find records on microfiche, so they can be available when City inspectors arrive.

They are coming the first week of April... This will be the biggest test for how high the hurdle will be to condo convert our 101 year old building.

Pre-Inspection Report

We've received our written pre-inspection report. This is an optional inspection by a former City inspector, to help identify things the actual City inspectors might cite us for, as required for condo conversion. Here is one of my partner's response to the document:

"I'm not terribly impressed with his report. For $600 I guess it will do... Certainly a few inaccuracies that we should address with him and have corrected. For example, my 220 electric for laundry was permitted and signed off - thankfully I kept copies. He outrageously suggests that I should remove $5000 worth of permitted laundry??? I don't think so!!"

And another: "A number of things on my list are not applicable - looks like he just cut and pasted."

Because some of our unit remodels go back to 2000, in many cases, he directs us to research permits on microfilm. It would have been helpful on this document to have been given a clue about where we go to do this. How would the average homeowner know the process for researching ten-year old inspections and permits on microfiche? Like, a URL or the name of the City department at least. I suppose there is a department called Building Inspection, but with this City you never know. After all, the condo lottery is managed by the Department of Public Works, Bureau of Street Use and Land Mapping Division. That's intuitive!

Note that on things like a kitchen "remodel" there needs to be separate plumbing, electric, AND general building inspector permits on file. What a crazy city. To put a new appliance in your kitchen you might need three inspector visits. No wonder the city has almost 30,000 employees.

Anyway, the list we have been given overall doesn't look too bad. We have a good contractor lined up to get work done.

The group will be meeting this Sunday, to decide what on this list we should address before the actual inspectors arrive.

Okell's Fireplace

Condo conversion is quite the cottage industry. It's a business pipeline for home repair merchants in the City.

For example, the pre-inspector says our old wall heaters have got to go. So we are all looking at options - from simply installing a new wall heater to going for a big upgrade - like a gas fireplace.

We went over to Okell's Fireplace this morning. The salesman said they do a lot of work for TIC owners who need to replace wall heaters. They have every type of in-wall and freestanding fireplaces imaginable. Very cool!

I would love a little fireplace. I'd like the flat to the wall zen style, with rocks on fire. But I can't vent up through our beamed ceiling, so we'd need to build something quite elaborate to accommodate my little zen fireplace.

Given all the other things that need to get done for condo conversion, can we afford the time and cost of building something this complex right now?

City Permits and Inspections

It was always assumed in our building that owners would have work done in their units with proper City permits and inspections. This was plainly stated at meetings, and it may even be in our TIC agreement. (It should be part of all TIC agreements.)

Surprisingly, we have just discovered that one of our owners had a significant kitchen remodel done with NO permits or inspections. This owner spent many thousands of dollars a couple years back having everything done perfectly to his taste. But now walls in that perfect kitchen must be opened for City inspectors to re-check and permit the plumbing and electrical work that was done.

This owner is throwing a fit. But whose fault is it? It's the owner's responsibility to tell the contractor all work must be permitted and inspected.

People, if you have any chance of converting to condo, do not skip getting permits and inspections. It's going to cost you a lot more later rather than doing it right the first time.

Does Your TIC Agreement Require Condo Conversion?

Does your TIC agreement require condo conversion if your building wins the lottery? That is something you should know before you buy into a TIC.

If your agreement mandates conversion, and you live in a building with a fair chance of winning the lottery (ie no protected tenant evictions, etc.) your group needs to have a pool of funds ready to go for the costs of condo conversion. Condo conversion is a significant expense, for the group and possibly for individuals as well. And this is on top of your regular dues, taxes, mortgage and insurance, which must continue to be paid through the conversion process.

All the bills for condo conversion come due in fast and furious progression. Make sure your group has discussed how to handle, and has a financial plan, so you don't waste time figuring this out after you win the lottery.

For common condo conversion charges, you can either build a condo conversion fund into your dues or you will need to levy special assessments. For code violation repairs to individual units, each owner is responsible for any work from the walls in. Make sure owners are aware of this. There should be ongoing reminders at your meetings about the need for individuals to have a savings account set aside for condo conversion.

If your TIC does not mandate condo conversion, then you must have a process outlined in the agreement for determining whether you will or won't convert. Everyone in the group needs to be aware of this process, and you may want to revisit this issue from time to time and amend the agreement as necessary. I think leaving the question of whether to convert or not to convert could be a very divisive issue, if left up to a vote that occurs after winning the lottery.

Pre-Inspection

On the advice of our lawyer, we hired Leo McFadden to pre-inspect our building. Condo conversion requires having the City building inspectors come in to check if your building is up to code. Any code violations the inspectors find must be repaired - whether or not you condo convert. A pre-inspection gives you an assessment of what City inspectors are likely to cite you for, so you can estimate repair costs before having the City officially come in.

Let's get to the juicy part first. If you Google Leo McFadden you will see he used to work in building code enforcement for the City, but resigned after the San Francisco Chronicle accused him of being at the "center of an ethics controversy." Apparently he formed a real estate holding company that held ownership interest in several San Francisco residential properties. From what I can tell, Leo's company would buy, renovate and flip properties that had been cited for code violations. My sense is the owners were in over their heads, trying to maintain old buildings. They went the cheap route - having shoddy work done without permits. When they got cited, they would bail and sell the property. Of course it is possible to take a darker view, and imagine a little band of thuggish inspectors roaming around looking for run down properties so they use the threat of endless citations to strong arm owners into selling.

But when the accusations were made, back in 2005, the City's Ethics Commission said city employees - including building inspectors - were free to buy and sell real estate provided they are not privy to or acting on information that is not available to the general public. Also, a city controller's review found no evidence of San Francisco building inspectors buying up property under review by their agency. To me, Leo seems like a decent guy who took advantage of an entrepreneurial opportunity, one that his job did not expressly prohibit. And he ended up a victim of yellow journalism.

Anyway, he resigned from the City, and went into business for himself. He certainly knows his stuff. He did a careful walk-through of our 100-year-old building, and pointed out things we will almost certainly be required to change - like our old gas wall heaters. We will be receiving a detailed written report shortly. This lets us get a jump on projecting costs and lining up a general contractor.

Solicitations from Everyone

As soon as you win the condo lottery, your mailbox will be filled with solicitations from lawyers, surveyors, pre-inspectors, and what have you. Yesterday I received a beautifully presented folder of information from a surveyor. This package must have been costly to produce and mail. But we have already hired our surveyor!

My advice to those who are trying to solicit condo conversion business is:

- Build relationships with the law firms that handle condo conversion. Most TIC groups will use the vendors recommended by their lawyers.

- Try to build some kind of relationship with the TIC owner community on an ongoing basis. You can do this by attending Plan C events, offering free educational information online or at events, etc.

- Don't wait to mail your solicitations. Prepare your materials, attend the lottery drawing to get the winner names and mail solicitations out the next day.