Ending San Francisco Condo Lottery Is Jobs Killer

by Randy Shaw on January 31, 2012

Real estate speculators are making an all-out effort to eliminate San Francisco’s 30-year old law restricting condo conversions. Their plan would allow unlimited condo conversions for a $10,000-15,000 fee, an amount which barely covers 10% of the cost of building a replacement rental unit. Despite claims that “now is the time to push the condo lottery bypass plan,” speculators have been promoting this plan since the Frank Jordan years. And the reason for their lack of success is that every time voters have been asked to weaken the city’s condo law, they have refused. And by large majorities.

Bypassing the condo lottery would be a public gift of tens of millions of dollars to speculators and others who are hardly in need. And it would be a huge job killer, eliminating desperately needed construction jobs and making financing for new condo projects even more difficult to obtain. The bypass would hurt newly built condo market in neighborhoods like Bayview and Visitacion Valley where the city has encouraged such developments. The condo lottery bypass is essentially a public bailout for failed speculators – many of whom evicted longterm tenants as part of the “deal.”

The current edition of the San Francisco Business Times has fired the first shot in what has become an annual campaign to destroy the thirty-year compromise between the real estate industry and tenants over condo conversions. This compromise allows the conversion of rental housing to condos but limits the number to 200 annually and prevents conversions of buildings over six units.

It is a compromise that real estate interests have tried to overturn by multiple ballot measures, all of which voters overwhelmingly defeated. Now the realtors hope to circumvent the voters will by getting six supervisors and the mayor on board with their often-rejected proposal.

Killing Construction Jobs

There is a reason that Mayor Lee’s vaunted 17-point plan for job creation in San Francisco does not include the condo lottery bypass: the measure kills jobs in a construction industry already suffering from high unemployment.

How does this occur?

It’s simple. Building condos creates living wage blue-collar jobs, and most of these new condos are slated to be built as economic engines for emerging neighborhoods like the Bayview and Visitacion Valley. These new developments are anticipated to boost surrounding businesses, creating as many as seven additional jobs for every new unit built.

In contrast, converting a rental or a unit owned as a tenancy in common (TIC) to a condo creates no jobs. And the majority of owners seeking the bypass have units in more upscale neighborhoods that do not need a condo conversion for economic revival.

If real estate speculators got what they wanted, a flood of condo conversions (the Business Times estimates 2,000 units) would hit the condo market. This would sharply reduce – if not kill – demand for new condos for sale in these emerging neighborhoods.

And it would also prevent thousands of new units in these neighborhoods from being built. After all, if you were a builder trying to get financing to build an approved project, why would a bank lend money to you when your units will be competing with thousands of newly converted units fresh on the market?

The speculators that want San Francisco to change a thirty-year-old law signed by Dianne Feinstein so they can instantly make a $100,000-200,000 profit on each unit. And potentially even bigger profits down the line.

And what exactly is the policy reason for eliminating rental units for upscale condos? If we want to change the condo law, it makes more sense to eliminate condo conversions entirely.

Think we would see many Ellis evictions if speculators knew that 3-6 unit buildings in San Francisco could never become condos? How about addressing this serious risk to long-term tenants instead of figuring out new ways for real estate speculators to get even richer?

The Political Strategy

Real estate speculators are reviving the repeately failed unlimited condo proposal in hopes it can become part of a deal with Mayor Lee over support for his proposed Housing Trust Fund ballot initiative in November. In exchange for realtor support, they want Lee and six Supervisors to enact the lottery bypass.

In other words, realtors want to eliminate thousands of rental units in exchange for backing a measure that will annually replace only a fraction of those lost. And since the lottery bypass sets a precedent for future “one-time” bypasses, it will open the floodgates to further TIC conversions and dramatically increase Ellis Act evictions.

San Francisco is far better off without a Housing Trust Fund than accepting such a deal.

Those who believe that voters will approve a Trust Fund that is a product of such a deal should study what happened to the De Young Museum bond in the 1998 election. After Mayor Brown made a deal three weeks before the election to pass through all costs of the bond to tenants (altering the Rent Law for this bond), tenants voted against the bond in massive numbers (80% “no” votes in the Mission) and it was defeated.

The bond was defeated despite tenant groups not mobilizing against the measure until after the ballot handbook was distributed and all major endorsements were made. Such was the fury of tenant voters who felt they had not been treated fairly by City Hall.

So what the realtors are really offering by linking unlimited condos to support for the Trust Fund is a poison bill. It also gives them an excuse for opposing the Trust Fund, as they can claim the Mayor and Supervisors rejected a “comprehensive solution” – i.e., one that includes unlimited condos – to the housing crisis.

Past history shows the realtors cannot defeat housing ballot measures when, as with the Trust Fund, only a majority vote is needed. Making a deal with them that alienates tenants is a sure-fire path to defeat.

“We Are Not Speculators”

The front people for realtor-led proposals for unlimited condos will have no connection to the real estate industry, nor claim to be interested in the huge profits reaped by condo conversions. Nor will they have evicted any tenants.

These folks will testify at hearings that it is not fair to lump them in with Ellis evictors. They will claim that they support rent control and will make no profit because they will live in their condos long-term and have no intention to sell.

But what exactly is the “crisis” or “unfairness” that these well-meaning TIC owners are enduring? The fact that they must continue to live under a law that was in effect for decades when they invested in their building?

Let’s keep in mind that the 3-6 unit buildings seeking to bypass the lottery were rental housing before becoming TIC’s. They stopped being rental either because prior tenants were displaced by a no-fault eviction, or tenants in place bought the unit from the building owner (a very rare occurrence, since 95% of San Francisco tenants cannot afford ownership units).

Buildings vacated by Ellis evictions are partially responsible for the number of TIC’s in the lottery, but even excluding these does not change the fundamental issue: 3-6 unit building that were built as rental units, and typically stayed rental units for over eighty years are now off the rental housing market when rental units in San Francisco are more scarce than ever.

“The Units Are Already Lost”

Backers of unlimited conversions frequently argue that these TIC’s are already lost to the rental market, so the city might as well get some money to allow their conversion.

But that’s false. Condos and TIC’s are already being used as rental housing throughout the city, with a critical difference: condos are exempt units from rent control under state law, while tenants living in TIC’s are covered by the city’s rent control and just cause eviction laws.

That’s another unspoken reason why realtors want unlimited condos and are not satisfied with TIC’s – it makes the landlord business much more profitable.

At a time when San Francisco rents are rising at record levels and people are lining up to compete for a single available rental unit, the city should be discouraging rather than promoting more condo conversions. An absolute ban on future conversions would protect the city’s rental housing stock and virtually end Ellis Act evictions; such a policy would also create badly needed jobs as new condos are constructed to meet demands for homeownership.

Randy Shaw is Editor of Beyond Chron and Executive Director of the Tenderloin Housing Clinic.

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