The Basics of Condo Conversion in San Francisco

Whether you’re a landlord considering ways to diversify your portfolio and increase your return on investment or a renter with hopes of one day buying a property in San Francisco, the condo conversion process has probably crossed your mind. It’s a complicated and potentially fraught process revolving around the delicate balance between the competing rights of landlords and tenants as well as the need for more affordable housing in the city. Let’s dive into the basics of condo conversion.

What Is a Condominium?

A condominium is a type of real estate where individual units within a larger property are owned separately by different owners, while common areas and facilities are jointly owned and managed by a homeowners association (HOA).

What Is Condo Conversion?

Simply put, condo conversion involves legally subdividing a multi-unit residential building into individual condominium units. The condo conversion process in San Francisco is fairly complex and the legal requirements are ever-evolving.

The Process of Condo Conversion

Here’s a brief overview of the typical steps involved in SF condo conversion:

• Compliance with Rent Ordinance: Before initiating the conversion process, landlords must ensure compliance with San Francisco's Rent Ordinance, which governs rent control and tenant protections. This includes providing proper notice to tenants and adhering to regulations regarding rent increases and evictions.
• Application Submission: Landlords must submit an application for condo conversion to the San Francisco Planning Department. This application includes detailed information about the property, such as its location, zoning classification, and proposed conversion plans.
• Tenant Notification: Tenants residing in the rental units slated for conversion must be notified of the landlord's intention to convert the property into condominiums. The notification process typically involves providing tenants with written notice and informing them of their rights and options.
• Tenant Buyout Offers: In some cases, landlords may offer tenants the opportunity to purchase their units at a discounted price as part of a tenant buyout agreement. These buyout offers must comply with San Francisco's Rent Ordinance and tenant protection laws.
• Conditional Use Authorization: Depending on the zoning designation of the property, landlords may need to obtain Conditional Use Authorization (CUA) from the San Francisco Planning Commission. This involves a public hearing process where stakeholders can voice their opinions and concerns regarding the proposed conversion.
• Compliance with Building Codes: Landlords must ensure that the property meets all applicable building codes and safety regulations before converting rental units into condominiums. This may involve making necessary repairs or upgrades to bring the building up to code.
• Final Approval and Conversion: Once all regulatory requirements have been met, the San Francisco Planning Department grants final approval for the condo conversion. Landlords can then proceed with the sale of individual condominium units to buyers.

Pros and Cons of Condo Conversion

From the perspective of a property owner considering converting their condo, here are the pros and cons of the process:

Pros of Condo Conversion

1. Increased Property Value

Converting a home into multiple condo units can significantly increase the overall property value. Each unit can be sold separately, often resulting in a higher combined sale price than selling the property as a single entity.

2. Higher Return on Investment

Selling individual condo units can provide a higher return on investment compared to renting out units. This is especially beneficial in a high-demand market like San Francisco, where condo prices can be quite lucrative.

3. Diversified Investment

By owning multiple condo units, you diversify your investment portfolio. This can reduce risk, as the financial performance of each unit may vary, providing a buffer against market fluctuations.

4. Homeownership Opportunities

Condo conversion creates more homeownership opportunities in a city where housing is in high demand. This can be particularly appealing to first-time buyers looking to enter the market.

5. Flexibility

Condo conversions offer flexibility for owners. You can choose to sell some units and rent others, providing a mix of immediate capital and ongoing rental income.

Cons of Condo Conversion

1. Regulatory Complexity

San Francisco has stringent regulations regarding condo conversions. Navigating the legal requirements—including zoning laws, tenant protections, and building codes—can be complex and time-consuming.

2. High Costs

The conversion process can be expensive. Costs may include legal fees, surveying, architectural planning, construction for necessary upgrades, and city fees for permits and applications.

3. Tenant Protections

San Francisco has strong tenant protection laws. If your property is currently rented, you must navigate these protections, including offering tenants the right of first refusal and potentially providing relocation assistance.

4. Market Risks

While condo conversions can offer high returns, they also come with market risks. Economic downturns or changes in the real estate market can affect the sale price and demand for condos.

5. Time-Consuming Process

The conversion process can be lengthy. From application to final approval, the process can take several months to years, depending on the complexity and any potential disputes.

6. HOA Formation and Management

Setting up a homeowners association (HOA) and managing it can be challenging. Owners need to establish rules, manage finances, and handle disputes among unit owners.

7. Impact on Existing Tenants

Current tenants may face displacement or changes in their living conditions. This can lead to legal and ethical considerations, especially if tenants are resistant to the conversion.

What Tenants Need to Know

Tenants in San Francisco should be aware that they have significant protections during a condo conversion, including the right of first refusal to purchase their unit and potential relocation assistance if they choose not to buy. Senior, disabled, or long-term tenants receive additional safeguards. Tenants must be notified of the conversion plans well in advance, and their rental agreements cannot be arbitrarily terminated during the process.

What Buyers Need to Know

Home buyers considering purchasing a condo in a converted building should understand that these units might come with established homeowners associations (HOAs) and associated fees for maintaining common areas. They should also evaluate the building’s condition and any recent renovations made during the conversion. Additionally, buyers need to be aware of the tenant history and any potential tenant-related legal matters that might affect the property.

What Landlords Need to Know

Landlords interested in converting their property to condos in San Francisco need to navigate strict regulations, including zoning laws, building codes, and comprehensive tenant protection statutes. They must provide tenants with advance notice and offer them the first opportunity to purchase their units. The conversion process involves substantial costs and legal requirements, so working with experienced professionals is essential to ensure compliance and success.

Finding a Place to Call Home in San Francisco

Living in San Francisco, you’ll never run out of new restaurants to try or beautiful views to take in. The condo conversion process can seem complicated, but there are benefits for property owners, renters, and buyers as long as everyone is careful to adhere to the rules throughout the process. 

Need help navigating the San Francisco housing market? At Willowmar Real Estate, we are here to help. Send us an email at [email protected] with any questions or for more information.