Unintended Evictions

An attempted solution to rental evictions may actually force more people out of rent-controlled apartments in an already tight San Francisco housing market

After a decade of double-digit San Francisco residential real-estate price increases, meanwhile, an individual condominium in the city fetches an average $767,000.

Tenancy-in-common apartments occupy a middle ground in this mammoth price spread. Because they're so complicated, and require groups of otherwise unrelated people to link together financially, TIC units average just over $640,000.

By buying a building at around $200,000 a unit and selling it for $640,000 a unit, speculators are able to cover their financing costs and make a tidy profit. So many of them have entered this line of business, and they've driven up prices and made buildings so expensive, that it's unprofitable to buy a building and rent the apartments out. As a result, buying a small apartment building in San Francisco these days only makes financial sense if you're planning to kick out the tenants and create a tenancy in common.

In other words, if you're a tenant in a rent-controlled building of three units or fewer, and that building goes on the market, it's almost certainly going to be turned into a tenancy in common, and you're sure to be thrown out.

"The sellers of the smaller buildings, they understand it's all market driven. They understand the game, and they have priced those units up considerably in the last 18 months," says Patrick McCarty, chief credit officer at Circle Bank of Novato, which specializes in making tenancy-in-common loans on San Francisco buildings.

Until now, people living in larger apartment buildings have been relatively safe from eviction. That's because it's extremely difficult to round up more than two or three home-buyers to jointly take out a tenancy-in-common loan.

That could change for the worse, possibly with the help of unintended consequences from Daly's anti-condo conversion bills.

Walker and Paulson's pseudo-condominium TIC loan, which allows a bank to lend money separately to individual tenancy-in-common buyers, could also help change all that.

Two institutions, Marin Bank and Circle Bank, have taken an interest, setting aside $20 million each for such loans.

But the product hasn't really taken off. Circle Bank has so far loaned $5 million, with three tenancy-in-common projects under way whose individual apartment loans may total another $5 million. The loans are expensive -- 7.35 percent versus 6.25 percent typical for a joint TIC loan.

McCarty says the price will go down if more banks get into the business of this type of loan, perhaps interesting more buyers.

And according to Walker, that's where Chris Daly's bogus anti-eviction bill comes in. Walker is counting on the anti-condominium legislation to boost interest in his pseudo-condo loans.

Last week the Board of Supervisors gave initial approval to Daly's two condo-related bills, one requiring property owners and real estate agents to tell potential buyers of condominiums whether someone had been evicted under the California State Ellis Act, which allows landlords to exit the rental business. The other requires the Planning Commission to hold special hearings whenever buildings of two or more units are converted into condominiums.

Desperate to untether themselves from their co-owners, yet unable to turn their apartments into condominiums, tenancy-in-common owners will eventually begin turning to pseudo-condo loans, Walker says.

"His legislation will actually help us," Walker says.

If the loans become hot, more banks will offer them, the interest rates will drop, and speculators will begin seeing profit in ever-larger buildings, evicting tenants as they go.

For tenants, this is not an attractive prospect. Unintended consequences rarely are.

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