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Housing Policy • September 1, 2005

BPOA Letter to HAC re: Condo-Conversion

The Berkeley Property Owners Association

2005 Hopkins Street • Berkeley, CA 94707 • (510) 525-3666

bpoa@bpoa.org

 

Housing Advisory Commission
2180 Milvia Street
Berkeley, California 94704
Re: Agenda Item #7 (September 1, 2005)

 

Dear HAC Members:

The Berkeley Property Owners Association (BPOA) urges HAC to reject the revisions to the TIC/condo conversion ordinance that have been proposed to you. The primary goal of the revisions is purportedly to make condominium conversions more attractive than TIC-conversions. As written, this ordinance will fail to achieve its primary goal. It will, we believe, have the opposite effect.

 

How We Got Here

Before this year, the City effectively banned both TIC conversions and condo conversions. Now the City has had to lift the TIC ban. Forced to choose between TIC conversions and condo conversions, however, most people and policymakers prefer condo conversions. Thus, the primary purpose of changes in the condo-conversion law is to make condos more attractive than TICs.

 

The Flawed Premise

The Housing Department’s proposals will fail to make condos more attractive than TICs because the recommendations are influenced by a false premise. The premise is contained on page 1 of the Department’s report. It states, in part:

". . . while relatively lower priced ownership housing is definitely needed in Berkeley, there has been a general policy consensus both that this should not come at the expense of the even greater need for rental housing available to people who cannot afford to buy. . . ."

First, there is no escaping the fact that the Department does not possess any verifiable vacancy statistics for Berkeley rental housing. The Department cannot provide any statistical support for the claim that there is a "greater need" for rental housing than for ownership housing, and does not try to. Many (including BPOA) have asked how the HAC or the Housing Department can possibly craft responsible housing

policy (let alone reach a "policy consensus") in the complete absence of statistics. We continue to ask that question.

Second, the Department’s assertion is contrary to all the indirect evidence that does exist. Rents are down—no one disputes this. Vacancies are up, at the highest rates seen in 26 years. The City’s construction data shows a 10% increase in rental housing stock—much of it now reportedly vacant. Meanwhile, around 35% of rental units enjoy artificially low, pre-Costa Hawkins rents.

Media stories about unavailable rental housing are a thing of the past. In contrast, not a week goes by without coverage of the increasing desperation of those who will do almost anything to own. Even the notoriously left-wing Wall Street Journal has advised that the Bay Area’s rental market is a far better value than the ownership market.

The Housing Department’s premise, then, is flawed. It has identified the wrong "housing crisis." But because the Department is focused on the crisis of the 1990s, all of its recommendations are designed to protect a "desperate tenant class" that doesn’t exist currently.

As I will explain below, these recommendations will only have two net effects. First, they will produce windfall financial gains for a small and completely random group of individual tenants. Second, they will make condo conversions completely unattractive to housing providers. TIC conversions will continue to be the rule, not the exception.

 

Flawed Premise, Flawed Results

Each one of the Department’s recommendations makes condo-conversion less attractive. Collectively, they all but ensure that TICs will be preferred. A few measures, however, are so extreme they may single-handedly doom any condo conversions. Chief among these is the proposed "lifetime tenancy." It merits comment as an example for the rest.

Obviously, no owner will ever spend the money to convert an apartment if that apartment will simply become a "mandatory rental" for the life of the tenant. Likewise, no would-be homeowner will ever buy such a converted unit. The only exceptions will occur where the new or old owner decide to pay what is effectively ransom to the tenant.

What public policy is served by this practice? On the one hand, some owners will convert to TIC instead of condo, defeating the whole point of the revisions. On the other hand, some tenants—regardless of their (or the owner’s) age, need, wealth, or the ease with which they can move—will "luck" into a massive transfer of wealth. This serves no public policy whatsoever.

Indeed, should the tenant decide not to accept the ransom, even worse public policies will be encouraged. There is no requirement that the tenant actually live in the unit during their life tenancies; not even rent control is that generous. And most strange of all, a controlled rent is guaranteed even if the City concludes that rent control is no longer needed.

 

Legal Challenges

This is a larger topic than can be covered in this letter. Suffice it to say that the proposed ordinance is an invitation to litigation.

The fee language alone is virtually impenetrable, seeming to require a calculation of the capitalized value of the difference between existing rent and the hypothetical costs to the tenant of owning the unit. Such poorly crafted language—assuming it survives a challenge for vagueness—only encourages people to end up in court.

Other parts of the ordinance flirt dangerously close with the very issues that doomed the City’s TIC ban. One wonders what will happen when the first condo purchaser, faced with a tenant enjoying his or her "lifetime lease," decides to go out of the rental business by Ellis-ing out his condominium. One also wonders how the lifetime rent control guarantee will fare against the restrictions of the Costa-Hawkins Rental Housing Act.

Stewards of the public fisc should be in the business of minimizing litigation, not encouraging it.

 

The Other Half of The Equation:

What Drives Owners To Convert In the First Place?

BPOA is disappointed to see that this major re-write of conversion laws fails to consider the forces that lead owners to convert in the first place. It is one thing to consider and then reject various approaches. It is another thing entirely—and quite irresponsible—to refuse to consider certain approaches in the first place.

Obviously, potential profit it the major force at work. But if the HAC is worried that too many rental units will be converted, it should ask two questions. First, does the City do anything that pushes owners into converting rental units? Second, can the City do anything to encourage them not to do so?

If the City has policies that push owners into conversion, one obvious strategy is to change those policies so there is far less incentive for conversion. And the obvious incentive for conversion is the cost of rent control. The HAC cannot have a serious policy discussion about condo-conversion without at least considering the role played by Berkeley’s "other" major housing policy. It is the elephant in the room, yet the Department’s report doesn’t mention it at all.

Second, the City can do things to encourage owners not to seek conversion in the first place. In times such as these, where selling a unit for ownership is far more attractive than holding a unit for rent-controlled rental, the City can and should intervene to make renting more attractive in the long run.

 

Conclusion

The Department’s proposals are all stick and no carrot. The HAC should not be surprised at all when owners respond accordingly. The all-stick approach of rent control has produced 26 years of political anger and landlord/tenant antagonism. These revisions appear likely to do the same.

In closing:

Condo conversions should be treated no less favorably than TICs, taking into account the market’s preference (reflected in purchase price) for condominiums.

There should be no rationing at all unless updated vacancy surveys show a genuine shortage of rental housing stock. Then, any rationing should be keyed to the vacancy rate (as is done by most cities).

Mitigation fees should cover the reasonable costs of processing conversion applications, and the actual damages incurred by tenants forced to leave their units as the result of a conversion. The city’s Ellis Act owner move-in fee may be an appropriate measure of actual damages.

Existing tenants should be given a right of first refusal when a converted unit is to be sold, but random financial windfalls should not occur.

Any new ordinance should include an incentive component, and the City should examine whether there are existing policies that encourage conversion unnecessarily.

Sincerely,

 

Michael Wilson

BPOA President

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