San Francisco seeks middle ground on ‘Tenant in common” property proposal

Commercial real estate managers seek TIC lottery revision.

According to KQED, a compromise is being reached regarding the conflicting interests in San Francisco's Tenants-in-Common units. 

The debate began in January. The average time for a TIC to win the yearly conversion lottery is more than 10 years. With TIC owners eager to convert given the housing market downturn, Mark Farrell and Scott Wiener proposed that 2,000 TIC units be allowed to bypass the lottery altogether and be converted in condos. The conversion would allow TIC owners to take advantage of low mortgage rates and refinance under more buyer-friendly terms.

The proposal, however, came under fire by Tenant's rights advocates who claimed the changes would disrupt real estate speculation and cause greater numbers of renter evictions.

TIC owners are under real pressure, as many are underwater and seeking to refinance the terms of their mortgages. During the housing boom, more than 2,500 TICs were sold, and many of the buyers and property management companies were falsely assured they could convert to condos in only a few short years by real estate agents.

Controversy
The IRS allows 1031 exchanges in TICs, which allows investors to roll capital gain from one sale into another investment property while deferring capital gains taxes indefinitely. By participating in a TIC, investors can pool resources to acquire larger investments like multifamily apartment buildings, office buildings, or commercial real estate like industrial facilities. This method of ownership has been long considered to level the real estate playing field.

According to RE Business Online, TIC is a form of real estate ownership in which:

  • two or more people co-own a property.
  • ownership shares do not have to be equal.
  • ownership interests can be inherited.
  • owners may receive a steady cash flow.
  • owners are not bothered with the day-to-day hassles of managing the properties.

The controversy in San Francisco concerns how TIC properties begin. Under the Ellis Act, a landlord can evict all of the tenants if the landlord wants to sell the property as a TIC. Since the 90's, other legislation has been passed that prevents mass evictions from occurring, but resistance to TICs still runs high. The eventual conversion to condos, and those condo prices rise, squeezes the city out of affordable housing options. 

"The basic idea is simple," David Chiu, board of supervisors president, told KQED. "To ensure that as we expedite these conversions that we protect tenants by suspending the lottery for new participants for at least 10 years."

The plan asserts that as the number of units allowed to convert grows, so will the moratorium on future conversions.

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