February 7, 2013
San Francisco's Condominium Conversion Lottery Results 2013
While San Francisco’s Land Use Committee couldn’t reach a decision and decided to delay their vote on the proposed condo conversion lottery bypass for another month in hopes of finding an undefined compromise that would satisfy both proponents and opponents of the proposed legislation, San Francisco’s Department of Public Works has drawn the lucky 200 winners and standby list for San Francisco’s 2013 Condominium Lottery.
We're still working on the official numbers, but according to our sources around 2,500 units entered the lottery this time around, including at least one belonging to a plugged-in reader who has entered eight years in a row, has yet to win, and remains stuck with a TIC loan he hasn't been able to refinance.
∙ San Francisco Condominium Lottery 2013 Results: Winner List | Standby List
∙ A Clash Over Condo Conversions At City Hall [SocketSite]
∙ The Devilish Details For Bypassing SF's Condo Conversion Lottery [SocketSite]
First Published: February 7, 2013 9:45 AM
Comments from "Plugged In" Readers
Congratulations on your successful economic rent seeking!
Posted by: Jorge at February 7, 2013 10:21 AM
Is there a good summary somewhere of this issue? who benefits, who loses, etc.? I'm trying to make heads or tails of it and admit I'm lost.
Posted by: Luis at February 7, 2013 10:28 AM
If they let all TIC's convert
TIC owners - Win: lower interest rate, easier financing, boost in property value
Tenants - Hypothetically Lose: this could encourage conversion of rental units to TIC/condos, reducing rent controlled housing stock
Other Condo Owners - Not much impact: some decrease in property value due to increased inventory, and bitter feelings about TIC owners who got a condo at a discount rate.
Posted by: Summarizer at February 7, 2013 11:28 AM
^^^ They are granting life estates to tenants in the TIC's that get converted, so I don't see how it hurts tenants. Please explain
Posted by: hangemhi at February 7, 2013 1:51 PM
The life estates you are talking about are for tenants in TICs already created. This is not the dynamic summarizer is describing.
Most TICs are created from apartment buildings that used to be used for rentals. When owners decide to sell the building as a TIC, they do what's necessary to get rid of the tenants to maximize the sale price, either through a buyout or an Ellis eviction (dunno how OMI would apply, maybe for one unit?).
Then the TIC is created and the units are gone from the rental scope, until the TIC owner decides to rent the unit out again, of course.
Tenant advocates know what's at stake here. Any incentive to make TICs more valuable is bound to motivate owners receiving sub-par rent to throw in the towel and evict/go TIC. A flushing out of the condo conversion backlog would create such an incentive.
Posted by: lol at February 7, 2013 2:38 PM
The objection of the tenants union to a mass conversion of TICs is that it will empty the current pipeline of waiting conversions which, in turn, will make it easier for future conversion candidates to convert. That will increase the pressures on existing rentals to be put up for sale as TIC units, thereby putting additional pressures on the rental "market".
At this point I'd really be interested in hearing if the tenants union, or anyone who is opposed to the conversion bypass as was recently proposed, has any other kind of plan or idea from which a compromise can be reached. It seems like the TU basically has drawn the line at the current conversion rate and would be opposed to any increase or bypass of any kind. I'd like to think that, given the declining eviction rate and significantly increased conversion horizon, that there'd at least be some room for compromise; maybe increase the pool by some amount in order to bring the first-entry horizon back to around 10 years.
Posted by: TJ at February 7, 2013 2:38 PM
Personally, I think that setting up a life estate for a tenant is beyond ludicrous. There's supposed to be a difference between owning and renting.
Owning brings stability and stability is deserved through hard work and perseverance. Renting is temporary. It's a transition. At least, that's what it's supposed to be.
If stability is earned only by having signed a piece of paper 20 years ago and no personal investment, then this goes against every principle we are supposed to teach our kids.
What our kids are learning today: You don't have to earn your way in life, just be smart enough to take what's in the next guy's pocket.
Posted by: lol at February 7, 2013 2:45 PM
The SFTU is basically similar to the NRA. They do not believe in compromise at all and take the position that all landlords and homeowners are evil and all tenants are saints. In the SFTU world everything is black and white and they will not budge whatsoever on any proposal that will decrease the number of units covered by rent control. There may groups that can work out a compromise on this issue but the SFTU is not one of them.
Posted by: Guest666 at February 7, 2013 2:47 PM
"What our kids are learning today: You don't have to earn your way in life, just be smart enough to take what's in the next guy's pocket."
Isn't Prop 13 takin what's in the next guy's pocket? I don't hear you complaining about that significant handout.
Posted by: moz at February 7, 2013 2:58 PM
That's because you are not following my posts. I have been very vocal against prop 13, like here, for instance. And many many more for the past 5+ years.
Not everyone is blinded by his own interest. I would suffer from the end of prop 13 for my 2010 purchase, but I understand the far-reaching consequences of a self-serving law.
Posted by: lol at February 7, 2013 3:09 PM
The argument that the condo bypass legislation will result in more Ellis Act evictions is ludicrous. SF disallows condo conversion of any building with more than one "no fault" eviction post 2005 or thereabouts. The bypass ordinance would not change that. Ellis Act evictions remove all tenants from the building and therefore render the building ineligible for condo conversion (unless there is only one tenant-occupied unit).
At most, emptying the "condo lottery line" will increase the incentive for landlords to negotiate *voluntary buy outs* of tenants whose rents are way below market. Such buy-outs should be encouraged as they are unambiguously welfare-enhancing: the tenant benefits (otherwise s/he wouldn't agree to the buy out), the landlord benefits (ditto), and third parties benefit (because after the buyout the unit will be renovated and sold or rented to someone who values it more than the original tenant).
It's also important to recognize that the only units in San Francisco that are arbitrarily "withheld" from the rental market are (1) owner-occupied TICs, and (2) units that are tenant-occupied at below-market rates. Many TIC agreements contain rental restrictions, for the understandable reason that occupancy of one unit by a tenant may subsequently frustrate condo conversion or refinancing by owners of the other units. After the building has been converted to condos, the decision of one unit's owner to rent his or her unit no longer puts the other owners at risk. So condos can enter or leave the rental market freely in response to renter demand. Measures that facilitate condo conversion thereby enhance the supply of potentially rentable units.
Posted by: observant neighbor at February 7, 2013 4:32 PM
If the increase in value of a rental building is all that is keeping landlords from selling off as TIC's, then today vs. last year every landlord would be listing their buildings for-sale. We're up approx 20% yoy, and 20% is arguably the value added when a TIC can convert to condos. The other massive incentive that would have had all landlords with low rents in rent controlled units is that rent rates are up even more.
So, again, please explain (I promise I'm not being snarky) why this matters?
Posted by: hangemhi at February 7, 2013 4:34 PM
There is a good summary of the issue here: http://www.plancsf.org/
Also, it should be understood that only a fraction of newly created TICs are eligible for the lottery, as significantly stronger regulations were put in place circa 2005/6 to prohibit TICs with eviction histories from converting. This point in not widely appreciated.
The current argument of the tenant activists suggests that more TICs will be created through evictions if the condo lottery backlog is cleared, yet TICs created through evictions are largely prohibited from becoming condos. So the nexus is lacking...
Oh and another point people often forget is that condo conversion only applies to buildings that are 6 units or less in size.
Posted by: @luis at February 7, 2013 4:47 PM
From the andysirkin.com site:
"Eviction of non-Protected Tenants can also affect a building’s ability to convert to condominiums. If tenants were evicted from two or more units after April 4, 2005, the period of owner-occupancy required to enter or bypass the condominium conversion lottery is extended to 10 years."
Therefore, someone purchasing a property as a TIC that was just Ellis-acted would have to wait 10 years + the usual 15+ years of the lottery.
Were the backlog to be flushed out overnight, the waiting period would be more in the range of 5-10 years. Which makes the total wait time in the range of 15-20 years. It's not outlandish to think that the lower waiting time will increase the relative desirability of TICs.
But I agree that this alone will not lead to a tsunami of evictions. Landlords who are losing money each and every month (quite a few are) will keep giving up little by little, one by one. Demand for Ellis-Acted TICs will dictate what landlords will do.
Posted by: lol at February 7, 2013 5:27 PM
From what I understand the TIC scheme usually requires a balloon mortgage which is an inappropriate risk for most first time home owners.
Posted by: Revulture at February 8, 2013 8:05 AM
The available mortgages for TICs are variable rate with 5 or 7 years fixed. Of course the variable rate after the fixed period is capped.
It's risky, but the downpayment requirements are weeding out the riskier borrowers.
Some people will purchase a TIC with self-financing or a token mortgage. After all, if your purpose is very long term and you love the place, why not? You get a place at a 25%-30% discount. TICs are for the long term, therefore why not go all in.
Posted by: lol at February 8, 2013 9:54 AM
Certainly the 5 or 7 year mortgage is amortized as though it were a 30 year with a reset or a balloon payment at the end. The 30 year fixed was developed at the end of the depression as part of the new deal because of the unacceptable risks of the balloon mortgage, which contributed to the great depression.
Posted by: Revulture at February 8, 2013 10:38 AM
A TIC comes with a 20 to 30 percent discount including the promise of a conversion to condo before the 7 year reset. Without the convert lotto, TIC risk is off the charts and virtually unsellable.
Posted by: revulture at February 8, 2013 11:00 AM
Actually, the main reason for the lower selling price is chiefly the higher interest rate.
If you take a 750K condo with 20% down and a 3.5% interest. Interest + property taxes (assuming a 2% annual increase) will be:
5 years: 146K
10 years: 286K
20 years: 538K
30 years: 735K
same property, as a TIC, selling for 550K, interest rate @5% assuming it will stay the same
5 years: 140K
10 years: 273K
20 years: 510K
30 years: 678K
These are very marginal differences. It the interest rate were to be reset higher, it would cost a bit more thana condo overall.
Pricing of TICs all boil down to the interest rate and the monthly payment.
Folks often do not assess risk the way they should. What they see is what they can afford today, and acceptable pricing will follow.
Posted by: lol at February 8, 2013 11:05 AM
"It the interest rate were to be reset higher, it would cost a bit more than a condo overall." Thank you. That is my point.
My initial comment was that the TIC scheme seems to depend on the 7 year balloon mortgage, an adjustable loan that is mostly or entirely interest only for the first 7 years which then adjusts or balloons upwards, entirely inappropriate for a first time home buyer for obvious reasons.
If this is the case, I don't think that a comparison of TIC loans to condo loans as though they would be identical except for interest rate is accurate?
Posted by: revulture at February 8, 2013 12:13 PM
"Some people will purchase a TIC with self-financing or a token mortgage. After all, if your purpose is very long term and you love the place, why not?"
From my understanding the reason why not would be that you share an undivided interest usually with complete strangers?
Posted by: revulture at February 8, 2013 12:27 PM
If the 2002-2006 bubble has tought us one thing, it's that in giddy times people will not look at the actual liability (mortgage amount) but the monthly expense (mortgage payment). Like "I make X, I can repay Y monthly and this allows me to purchase at a Z price".
For 2 or 3 years, people had their eyes opened on the meaning of a debt load (500K debt is huge when you're making 50K), but this is quickly fading away now. People are wired that way and not much is done to make them think clearly...
Taking that into account, buyers will not weigh the risk of a painful reset into account. The general behavior is 1) - who knows what will happen, probably nothing bad, right? 2) - my income will have increased by 15, 20, 25% by now and I can afford whatever increase, and 3) - it's a started home, We'll likely sell before the reset.
This is the lower hanging fruit, a bit similar to subprime, except for the strict underwriting standard (the bank cannot repackage these mortgages) and the 20 or 25% required downpayment...
Posted by: lol at February 8, 2013 12:28 PM
the reason why not would be that you share an undivided interest usually with complete strangers?
If you purchase a condo, you're in business with complete strangers as well. TIC owners are responsible for the inside of their units and share the responsibility of all common areas. If someone redoes his kitchen in a TIC, that someone is the sole responsible for his remodel. Just like a condo association.
The biggest difference with condo associations is financing, really. And fractional mortgages are a big help to make it workable.
Posted by: lol at February 8, 2013 12:34 PM
"in giddy times people will not look at the actual liability...buyers will not weigh the risk of a painful reset into account."
I think this is exactly my point, that first time home buyers will not look at actual liability, and will succumb to the sales pitch of some real estate conman willing to steal the life savings of an unknowledgeable investor.
Because people who were less "giddy" and more willing to assess true liability, including the more honest investors who chose to keep renting rather than hop on this unsavory merry go round, are the parties who must shoulder the bail outs, TICs should be limited to accredited investors much the same way that limited partnerships are limited, since TICs and limited partnerships seem to have much in common.
"Accredited investor is a term defined by various countries' securities laws that delineates investors permitted to invest in certain types of higher risk investments including seed money, limited partnerships, hedge funds, private placements, and angel investor networks. The term generally includes wealthy individuals and organizations such as banks, insurance companies, significant charities, some corporations, endowments, and retirement plans.
In the United States, for an individual to be considered an accredited investor, he or she must have a net worth of at least one million US dollars, not including the value of one's primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with his or her spouse if married) and have the expectation to make the same amount this year." This rule came into effect in 1933 by way of the Securities Act of 1933."
Posted by: revulture at February 8, 2013 1:04 PM
OMG what does life insurance have to do with all this?
Posted by: revulture at February 12, 2013 9:11 AM
Possibly the insider loans?
Life insurance assets $762,180
insider loans $760,312
Posted by: revulture at February 12, 2013 9:33 AM
I just think it is a large figure, if correct, the $762,180 (in thousands) because Sterling apparently had 127 employees on December 31, 2011, and life insurance assets for banks are usually to offset employee benefits.
(BOLI assets are used to recover costs of employee benefits and offset the liabilities of retirement benefits, helping banks to keep up with the rising benefit costs. )
762,180,000 / 125 = 6,001,417.
Six million dollars in benefits per employee, would be a GREAT place to work?
A discrepancy of some kind because the FDIC website lists insider loans at zero, but also lists life insurance assets as only 26,847.
Confusion, the story of my life.
Posted by: revulture at February 12, 2013 2:33 PM
Here. FDIC statements for Sterling Bank and Trust FSB.
Posted by: revulture at February 12, 2013 2:35 PM
The reason I mention it and the reason I think it is possibly some kind of issue, even if just that a website posted inaccurate financials, is said in this article...
"... insider loans aren’t illegal nor do they lead to bank closures. However, they can indicate an institution’s culture.. “It’s an insidious thing that can slowly weaken the internal controls at a bank to make it vulnerable to fraud or risky loans” ..."
Posted by: revulture at February 12, 2013 2:57 PM
Are you having a debate with yourself? What's going on here?
Posted by: R at February 12, 2013 3:09 PM
I would trust the FDIC more than a website that has a disclaimer that says "Based on public records. Inadvertent errors are possible."
Posted by: lol at February 12, 2013 3:37 PM
ha ha ha! Definitely.
But I still find this interesting for some nerdy reason. If Sterling really only has zero life insurance would you almost have to ask why not, (according to internets)?
"Cash value life insurance is one of the most important assets of a bank, particularly America’s large banks.
Banks purchase so much cash value life insurance that life insurance of this type has its own name BOLI (bank-owned-life-insurance). Banks own so much BOLI that the banks could be considered life insurance companies unto themselves. According to the Federal Deposit Insurance Corporation (FDIC) and the General Accounting Office (GAO), BOLI is a cornerstone of a bank and one most important assets in the nation’s banking and financial systems."
Posted by: revulture at February 13, 2013 3:05 PM