The Condo Conversion Initiative: Fact Sheet

WHAT DOES THE MEASURE DO?

• Empowers tenants to buy their own homes at a substantial discount.
• Protects tenants from uncontrolled TIC conversions and Ellis Act evictions
• Provides new revenues to the City for maintaining and expanding its affordable housing programs.
• Restores balance to our City:  homeowners are now less than 40% of the population, and will soon be only the very wealthy.

HOW DOES IT WORK?

• Increases the cap on condo conversions to 500 from the present 100 (this would affect only two percent of current stock, much of which is now vacant).  The 100 cap would be restored if vacancies fall below 3%.
• Sets a reasonable up-front affordable housing fee for all conversions ($8/ft2).
• Gives existing tenants a right of first refusal and a five per cent discount off the sales price of any converted unit, and substantial payments if they choose to move out.
• Reaffirms tenant protections under existing law.

WHAT ABOUT THE CITY'S STOCK OF AFFORDABLE HOUSING?

Conversion opponents argue that there is a crisis in Berkeley rental housing.  They imply that rents are skyrocketing, that Berkeley tenants are below the poverty line, and that allowing even a few hundred condo conversions will result in “massive” evictions. None of this is true.[1]

• Since 1990, there has been a steady increase in Berkeley's rental housing stock, even while ownership housing has stagnated.  The 1990 census  indicates that tenants were 53.4% of Berkeley's population.  In 2000, they were about 57% of the population.  In 2000, there were 25,745 rental units in the City (57% of all housing units), and city figures indicate that about 1000 units have been built since, for a 4% increase in the last five years.  This excludes the additional university housing units which have come on line, or which are under construction (a total of about 2000 more units).  With the City forbidding condo and TIC conversions, and with no space for new single family homes, we estimate that tenants are now more than 60% of the population, and that rental units are more than 60% of the total living units in Berkeley.  The tax burden has beccome more concentrated than ever on a shrinking percentage of homeowners.
• There is a surplus of Rental Housing in Berkeley: Despite repeated requests by people like Gordon Wozniak, the City Council and the Rent Board have refused to do a vacancy survey of Berkeley rental property.  The 2000 census showed a vacancy rate of 3%. The number of unfilled newly constructed units, the prevalence of “for rent” signs on older buildings, falling rents and private surveys point to a current vacancy rate in excess of 5%.
• Rents are down in Berkeley:  About eighty percent of the Berkeley rental market is at market rates. [2]  Market rents, adjusted for inflation, are lower today than they were in 2000. Rent Board statistics show that median rents for new tenancies in the first quarter of 2000 were $1500 for two bedroom units and $1100 for one bedroom apartments.  In the first quarter of 2006, the 2BR unit was going for $1400 and the 1 BR for $1100.[3]  In the meantime the cost of living index rose by 22.5%, indicating that in real terms rents have declined by an equivalent amount.  The specter of hundreds of tenants being forced into the streets, and losing affordable units, is a pure scare tactic, with no factual basis.  Indeed, the initiative now being circulated would key conversions to there continuing to be substantial vacancies in the marketplace.
• The real housing crisis in Berkeley is in affordable home ownership.  The Chronicle only last week published figures showing that while a family in 1970 at the Bay Area  median could have financed their own home with 25% of pre-tax income, it would cost them 50% of their income to do so today.  In Berkeley the median price for a starter home is now over $700,000.  There is simply no way that teachers, public safety workers, and other middle class persons can own a home in Berkeley.  Tenants who finish their schooling and who want to raise a family simply move out of town.
• The conversion initiative gives tenants a way to own their own homes in Berkeley at affordable prices.  It does so, first, by creating units in the $300,000-500,000 range which do not exist today, and second, by providing a right of first refusal and substantial cash payments to tenants who want to buy a converted unit.  Because dollars paid for a home are tax deductible, the real cost of home ownership to many tenants  would be less than they are paying today in rent.  Consider, for example, the “before” and “after” picture for a tenant paying monthly rent of $1500 for a two bedroom unit, who chooses to pay $400,000 for the same unit as a condominium.  For these purposes we will assume a ten per cent down pay (or five percent, net of the cash subsidy provided by the proposed  ordinance.

Sales Price:  $400,000

Less: cash payment from owner (5%): ( $20,000)

Less: rest of down payment:  ($20,000)

Net Amount (financed at 6.5%):  $360,000

Monthly interest payments:  $1950/mo

Plus property taxes @1.5%: $500/mo

Pre-Tax Cost To Own: $2450

Less: Tax Savings @40%:  $1470/mo. net cost to own.  Compare net cost to rent: $1500/mo.

• Helping people to help themselves:  The above figures do not show the other tangible and intangible benefits of home ownership.  The most obvious is equity appreciation.  If Berkeley had allowed condo conversions in 1990, hundreds or thousands of tenants would have stayed in town and would have seem their personal net worth increase by hundreds of thousands.  The City would have seen its tax revenues increase, and the schools would have had relief from their declining enrollment.  Finally the delicate balance among our population groups would have been preserved. As it is is, the City is evolving toward a place where only the wealthy, a distinct minority, will be able to own, while the rest of the population will be renters, many short term and without a long term stake in Berkeley.

[1] Statistics come from the Report of May 16, 2006 by Steve Barton, Housing Director, to the City Council;  the Rent Board's database;  the 2000 U.S. Census;  and the Bureau of Labor Statistics.

[2] Of 25,745 rental units as of 2000, 17,692 were rent-controlled.  The remainder were exempted, assumedly because they were built after 1979.  Of rent- controlled units, 4,423 (or only 17.2 of the total stock) had not gone to market rates as of May, 2006.

[3] The City's rule of thumb for measuring “affordability”  is whether housing costs exceed 30% of  household income.  Median household income in the Bay Area is about $89,000/year.  Thirty per cent of that is 26,700, or $2225/month.  By this standard Berkeley rents are “affordable” for those in the median. City staff argues that Berkeley incomes are in fact well below the median, but admit that this results from the inclusion of students as “households”.  Most students, of course, have outside sources of income that would not be included in income data.  If the student population is excluded, there is no reason to think that Berkeley incomes are different from those in neighboring cities.