Screwed

A lawsuit against the city highlights an affordable-housing program's decades of mismanagement — and the middle-class homeowners who lost out as a result.

The Goldmine Hill Condominium Complex nestles in a warren of steep, quiet streets lined with pine trees near the top of Diamond Heights. When fog isn't blowing in from the west, nearly any spot you stop to catch your breath while trudging up Goldmine Hill offers luxurious views of the city. To the east, rows of Victorian homes cascade through the Castro and Noe Valley to the green dome of Bernal Heights Park; to the west, the long avenues of the Sunset and Parkside districts reach to the Pacific.

Goldmine Hill's shingled condos and walled-in pool contribute to a feel that is distinctly suburban. But most of the people who live here like it that way, and for Phyllis Lund, a retired nursing assistant who moved into a studio at the complex 18 years ago, the place's quiet seclusion was a selling point. Lund savors the sense of enclosed community; she even started an informal book-lending library at the complex's main office. With its Murphy bed and single bathroom, Lund's condo is tiny even by urban standards. But she feels at home here.

"I love it," she said. "I like the neighbors. I like the location. I like being in the city, but not living in the city. I'll probably be here until I go out feet first."

A condominium building at Goldmine Hill, a residential complex in Diamond Heights where many homeowners are suing the Mayor’s Office of Housing.
Frank Gaglione
A condominium building at Goldmine Hill, a residential complex in Diamond Heights where many homeowners are suing the Mayor’s Office of Housing.
Phyllis Lund says the studio apartment she owns is worth $100,000 less than it should be because of regulations the city never told her about when she bought it 18 years ago.
Frank Gaglione
Phyllis Lund says the studio apartment she owns is worth $100,000 less than it should be because of regulations the city never told her about when she bought it 18 years ago.
David Cincotta, former deputy director for housing in the Mayor’s Office, thinks condo owners in the city’s below-market-rate housing program got a raw deal.
Frank Gaglione
David Cincotta, former deputy director for housing in the Mayor’s Office, thinks condo owners in the city’s below-market-rate housing program got a raw deal.

In anticipation of that day, Lund several years ago had a lawyer draw up a living trust in which she left the condo to her son. Soon after, however, she got a rude surprise. It turned out that she had no say in what happened to her home once she left it. The city of San Francisco did.

Lund learned that her condominium was enrolled in the city's Below Market Rate (BMR) Condo Conversion Program, and as a result was subject to strict regulations on renting, resale value, and inheritance. She said she had never been notified of these restrictions when she bought her condo in 1992, and had not been aware of them until fellow Goldmine Hill homeowners began talking about the regulations in 2008. Among the facts Lund discovered was that the city would not let her home be sold by her or her heirs for more than $200,000 — even though its market value has now climbed to $300,000.

"This is very wrong," Lund said, explaining that she had worked to pay off her mortgage and a monthly $360 in homeowners' fees without help from the city. "This was the one thing I did on my own. This is the one big thing I own."

Lund is one of dozens of homeowners who say the city's extensive control over their most valuable pieces of property came as a shock. The group includes 66 BMR condo owners (Lund is not among them) who have filed a federal civil-rights lawsuit against the Mayor's Office of Housing, asserting violations of due process and equal protection and an unconstitutional taking of private property. An attorney representing the group estimates that roughly $100 million in home equity stands to be erased for her clients because the city mismanaged the housing program.

Dating back three decades, the BMR condo program offered hundreds of first-time homebuyers condominiums at discounted prices at Goldmine Hill and other locations throughout San Francisco. Yet some now argue that the program's uneven administration and oversight have done as much harm as good.

Some owners involved in the current lawsuit say they were never told about future resale restrictions when they bought their homes, while others say they believed limits on resale value would last for only 20 years, after which the condos would be theirs to do with as they pleased. Records reveal that many units, despite being intended for low-income occupants, were sold on the open market — and often at a tidy profit. Documents culled from the history of the program show that even real-estate professionals and city officials were confused over the program's guidelines.

While city housing officials acknowledge the program has been poorly run, they assert that homeowners have been unable to provide hard evidence — in the form of written records or communications — that they were misled by government employees. They argue that the city cannot relinquish hundreds of units of its affordable-housing stock based on rumor.

Yet the views on this at City Hall are not unanimous. One former high-ranking city official with direct knowledge of the BMR program said that the Mayor's Office's unyielding stance toward the condo owners has been a mistake. "It reminded me a little bit of the way the Native Americans were treated. The Westerners came along and said, 'Prove to us that you own this land,'" said the official, who requested anonymity because of the sensitivity of his current position. "The city just ran roughshod over them. It was not one of our prouder moments."


In the 1970s, San Francisco housing officials saw a rapid gentrification crisis unfolding. Apartment-building owners across the city were converting their properties to condominium complexes, driving out tenants in the process. To address this problem, the city crafted a law obligating building owners to set aside a certain fraction of the new condos as affordable units, and give their low-to-moderate-income tenants a chance to buy. Thus was born the first version of the Below Market Rate Condo Conversion Program. But like many government initiatives conceived with noble intentions, it was destined to go off the rails.

For much of the past 30 years, the program has been plagued by poor record-keeping and confused enforcement of its own regulations. Responsibility for it changed hands over time among various government agencies, including the Department of Public Works, the Division of Real Estate, and, most recently, the Mayor's Office. This bureaucratic shuffling made the program's administration uneven, with one particularly puzzling result: Hundreds of condo owners were able to sell their ostensibly affordable homes at full price, on the open market — and, in many cases, with the blessing of city officials.

According to the city's master list of below-market-rate condominiums, provided in response to a public-records request from SF Weekly, 475 of the 1,015 condos originally enrolled in the program have been removed from it over the past 30 years. Some were mistakenly enrolled in the first place, or let go with a special class of units that never had resale restrictions. But many more were "released" by the city to be sold by their owners on the open market, purportedly because interested parties in the city's designated low-to-moderate-income bracket of buyers could not be found.

Doug Shoemaker, director of the Mayor's Office of Housing, accounts for this supposed lack of buyers by pointing to periodic downturns in the real-estate market, particularly in the years after 1989, when the Loma Prieta earthquake caused extensive property damage across the city. During such periods, he said, the BMR condos were less desirable when compared to other properties without restrictions that could be bought at low prices.

Yet records of sales transactions on the condos that were released tell a more complex story. A sampling of such records reviewed by SF Weekly reveals that some units were flipped at much higher prices than would have been allowed under the city's resale guidelines, in some cases only months after they were released.

In June 1990, for example, a below-market-rate condo on 16th Street in the Mission District was let go after a four-month period in which the owner had reportedly been unable to find a buyer at the $88,000 price the city had established. Two months later, city property records show, the same unit was sold on the open market for $130,000. Likewise, in April 1990, a condo on 15th Street near Corona Heights Park with a city-set resale price of $116,000 was released, only to be sold a year later at a market value of $212,000. In one particularly striking case, a condo with a below-market price of $86,000 was released in April 1989 — and then sold for $229,000 in June.

Prior to their units being released from the program, these owners had to provide the city with documentation to prove that they were working in good faith to find a low- or middle-income buyer for the property. It's also worth noting that the city's income requirements forced sellers to deal with a smaller pool of potential buyers with fewer financial resources. (Today, the equivalent annual income of qualifying purchasers would range from $54,000 to $81,000.) But records provided by the Mayor's Office on released condos show there was no consistent protocol for marketing procedures or oversight by city officials. In some cases, Xeroxed newspaper real-estate listings were accepted as evidence.

Given the obvious financial incentive for owners to underadvertise their units in the hope of selling them at full value — and the speed with which some units sold immediately after release from the program — the city's failure to take a more direct role in the process was a serious mistake, according to the lawsuit against the city in federal court that characterizes the BMR program as "a badly broken government program ... which has for years been plagued by mismanagement, incompetence, secret rules and policies, unevenly and unequally applied."

In some cases, improper sales of BMR condos simply escaped city officials' notice. In 2006, Jennifer Wilson, an FBI criminal lawyer, sued the seller and brokers from whom she had bought a Nob Hill condominium two years earlier for $473,000. It turned out that the condo was actually enrolled in the program, and should not have been sold for more than $180,000. Timothy Flaherty, Wilson's lawyer in that case, said the parties eventually negotiated a confidential settlement.

According to Leslie Johnson, one of the lawyers representing condo owners in the current lawsuit against the city, several of her clients also unknowingly bought BMR condos at full market prices. She has this to say about her foray into the history of the program's administration: "It's like being in Alice in Wonderland."


For disgruntled affordable-condo owners, the steady trickle of other below-market units out of the program over the years is a telling sign of mismanagement. But their main gripe is more personal. Despite city officials' protestations that the condos were intended to be preserved as permanently affordable housing, owners say they were repeatedly misled to believe that the resale restrictions on their homes would one day vanish — and, as a result, made financial plans for old age and retirement counting a full-market-value home among their assets.

"They always had the expectation that if they got in a jam, they could sell or refinance and get a decent return on their investment," said Jay Oakman, a retired Coast Guard officer who bought his unit at Goldmine Hill in 1987 believing that resale restrictions would only last for 20 years. "The city has totally squashed any effort to do that."

In a series of 2008 hearings on the BMR condo program, the Board of Supervisors listened to dozens who told more or less the same story as Oakman: They knew about resale restrictions on their homes, but were under the impression that they lasted only 20 years from the time of purchase. While that number is nowhere enshrined in city law, the concept of such a limit was clearly prevalent, with varying degrees of certainty, among real-estate professionals and even city officials from the very beginning.

David Cincotta, who from 1972 to 1980 was deputy director in charge of housing at the Mayor's Office of Community Development (precursor to today's Mayor's Office of Housing) and helped create the BMR condo program, said he and other officials had in mind that the units' affordable status would be rescinded after two decades, thus nurturing the original batch of low-to-moderate-income buyers onto the open market.

Such a 20-year sunset clause on affordability guidelines had parallels at the time in federal and state housing programs, Cincotta said. But given the initiative's primary focus on preventing evictions, he said, the details of the condos' future weren't hammered out.

"I'm not saying we didn't focus on what was going to happen years out," he said. "We figured that over time that problem would resolve itself, and the solution might be that after 20 years there would be a forgiveness of the subsidy that was built into the program." (Cincotta, now a private land-use attorney at the San Francisco firm of Jeffer Mangels Butler & Marmaro, briefly represented a group of Goldmine Hill homeowners trying to work out a nonlitigious solution to their predicament. He said he has not worked for them in more than a year.)

Notions of a 20-year lifetime on BMR restrictions persisted. Adding to the confusion, restrictions on many of the units, following a now-outdated practice, were recorded on subdivision maps instead of on property deeds, where they would have been more visible to buyers.

A city brochure on BMR condos produced by the Mayor's Office of Housing under former Mayor Willie Brown states that units are "deed restricted for a term of 20-50 years." A 1987 letter from a real-estate broker to a tenant whose unit had been converted to a moderate-income condo, supplied to SF Weekly by the homeowners' attorneys, states, "The sales price of this unit is controlled for 20 years from the date of the first sale." As late as 2005, a memo from Mayor's Office files refers to a condo unit that "may not now still be subject to the 20 years (?)."

Like Flaubert's God in the Universe, the idea that condo restrictions lasted only 20 years was present everywhere and visible nowhere. "We were told any number of ways, any number of times — verbally, not in writing — we were told about this 20-year thing," Oakman said. In particular, he said, one city official — Jeanne Lu, who today is still employed by the Mayor's Office of Housing — "always maintained that the city had no real interest beyond 20 years. She was saying, 'I don't think it would be fair to go beyond 20 years.'"

Oakman said his own unit was appraised at a fair-market value of $765,000 a couple of years ago; by contrast, the city said it could be resold at just over $300,000. For Oakman, the idea of that much money being subject to what he views as bureaucratic whim is hard to accept.

At a hearing last year before the supervisors' Land Use and Economic Development Committee, then-Supervisor Gerardo Sandoval — the only lawyer on the committee at the time, Sandoval became a judge after his last supervisorial term ended in 2008 — said the notion of a 20-year limit on resale restrictions was simply too common to come from rumor or coincidence.

"How did so many people get this wrong? I think the answer has got to be that the city really did contribute to that perception, and that's really hard to get around," Sandoval said. "There is a fairness issue here, and we have been part of the problem."


While condo owners and their attorneys have accused city housing officials of disregard for their property rights, those officials understandably view their responsibilities in a broader context. If today's crop of low- and moderate-income buyers are to have the same opportunities as those who bought condos 20 or 30 years ago, they reason, all the units currently enrolled in the BMR program must remain priced at reduced rates.

A motion filed late last month by the city attorney's office in response to the homeowners' lawsuit pointedly sums up this view. "Having reaped those benefits for up to 29 years, Plaintiffs now seek to change the terms of the deals they struck with the city," it states. "As California courts facing similar claims have concluded, Plaintiffs are simply trying to 'get out of a contract in order to make more money.'"

If you accept housing officials' contention that the condos in question were intended to be permanently affordable, this argument is hard to gainsay. San Francisco, like parts of New York or Los Angeles, is a metropolitan island of fantastically expensive real estate. The acute lack of housing within the buying power of middle-class professionals has gradually transformed this city into what The Economist recently called "a playground for the ultra-rich and a sewer for the underclass."

"Statistically, only 25 percent of residents of San Francisco are owners of their homes. That's the lowest in the country, next to Manhattan," said Tracy Parent, a board member of the San Francisco Community Land Trust who supports maintaining restrictions on the BMR condos. "Our city is very small, and the demand will always be higher than the supply. It's very important to use our public resources to preserve the affordable homeownership opportunities that have been created."

There is also reason to question whether all those involved in the lawsuit against the city have an equally strong case. Plaintiff Nancy Trogman told SF Weekly that she knew about restrictions on her condo over the years, but only vaguely, and never approached city officials to find out more. "I've been in this for 27 years, and I feel that I should be able to do what I want with my condo," she said. "I knew what I was going to have to sell it for. I know some people felt that it was only good for 20 years. I can't say whether I felt that or not. I never even talked to anybody at the city."

City officials can offer evidence of at least some past efforts to educate homeowners about condo restrictions. The Mayor's Office of Housing provided SF Weekly with a 1992 letter sent to Dee Modglin, one of the plaintiffs in the current lawsuit, which clearly outlines the resale restrictions to which she and others now object. Johnson, Modglin's lawyer, said the letter was written years after her client purchased her condo, and dismissed it as an example of the city "trying, very inartfully, to build a paper trail" to retroactively enforce its regulations.

Many homeowners cite Lu in particular as the source of their assumption about condo sale restrictions. According to Myrna Melgar, director of homeownership programs at the Mayor's Office of Housing, Lu cried after being confronted with these assertions. She has also apparently denied them. "There's a lot of 'Jeanne Lu said this, Jeanne Lu said that.' Jeanne said she didn't, so that's it," Shoemaker said.

In the end, Shoemaker said, no one has been able to produce a record of misinformation convincing enough for the city to simply abandon its claim on more than 500 affordable homes.

"We've never had a document produced that speaks to this issue of why people thought there was a time limit on their ownership rights, and that's really been the central narrative of the whole debate," he said. "Ultimately, real estate is a very legalistic, written culture. It's not so much what our office said. People who knew each other provided information to each other in an oral culture that kind of became the truth. Most of us would expect to get things in writing."

Including judges. From a legal standpoint, experts say, the condo owners' argument is a long shot. Even Johnson acknowledges that she has uncovered no particularly damning document from the city: "We're aware of no smoking gun, per se." And the idea that government at any level should be held responsible for misinformation delivered by its employees is one that courts have been loath to embrace. As any law student can tell you, a major principle of American jurisprudence is that everybody is presumed to know the law — Ignorantia juris non excusat.

"The courts are, in general, reluctant to probe deeply into allegations that government officials told people not to comply with a law, because it's such a dangerous area to get into," said John Leshy, a property law professor at UC Hastings College of the Law. "It would turn every conversation with a government official into a lawsuit."


Recognizing the mess the city had made, the Mayor's Office of Housing last year set out to clarify and codify, once and for all, the restrictions on ownership rights that had been subject to so many conflicting claims. The timing of this effort was no accident. Increasingly confused homeowners had begun asking for details on the rules governing their condos — and the purported 20-year sunset on resale restrictions was nearing for those who had bought condos in the 1980s.

The restrictions that the Mayor's Office established — or merely clarified, as the city would have it — were almost uniformly objectionable to many homeowners in the program. Renting was forbidden. (A grandfather clause was established, allowing those already renting out their properties to continue doing so for a period of several years; in offering this option, Shoemaker acknowledged that his office had misled condo owners by telling them it was okay to rent the units, which were supposed to be owner-occupied.) Those who renovated or in any way fixed up their units were given limits on how much of the cost could be included in the resale price. The legislation also designated the condos as permanently affordable housing, with accompanying restrictions on the properties' price and the income level of those who could inherit them — and no acknowledgment of any limit, of 20 years or otherwise, on resale restrictions.

Perhaps most controversial was an aspect of the ordinance that the Mayor's Office had billed as a concession: A buyout option was offered to those who had purchased BMR condos in the particularly chaotic days before 1992. This was the year that city officials began circulating an affidavit alerting new BMR condo buyers to restrictions on their units, though there are questions about who actually received it and whether it stated the guidelines accurately.

The buyout provision allowed condo owners to pay a one-time fee to permanently exit the program and gain the right to sell their homes at full market value, but for many, the fees — established on a sliding scale from $150,000 to $500,000, depending on the size and income designation of the unit — were prohibitively expensive. Lund, for instance, would have to pay $150,000 to exit the program. That's half the full market value of her studio.

If the Mayor's Office was willing to acknowledge that past mismanagement entitled pre-1992 condo owners to buy their way out of the program, the owners asked, why make it financially ruinous to do so?

For a time, the fate of this legislation was uncertain. Dozens of homeowners and their lawyers flooded into City Hall for supervisors' hearings on the program, complaining of misinformation they had been provided and an unwillingness among current city housing authorities to agree to a fair compromise.

In the end, the Mayor's Office of Housing got its way. In a July 2008 committee hearing on the legislation, then-Board of Supervisors President Aaron Peskin said that while the upset homeowners had "remarkably compelling stories," the Mayor's Office deserved some credit for trying to fix the BMR condo morass rather than punting on it.

"It's kind of rare in government when somebody stands up and admits they've been doing something wrong for 20 years, and that's an interesting thing for us all to ponder," Peskin said. "As much as I'd like to accuse and blame somebody, this is no one Director of Housing or Mayor's Office of Housing person's fault. This is no one Board of Supervisors' fault. This is no one mayor's fault. This has gone on over numerous mayors, over numerous administrations, and finally somebody had the political fortitude to stand up and say, 'We have to fix it.'"

On Dec. 16, 2008, the ordinance passed the full board 9 to 2. (Sandoval and Chris Daly were the dissenting votes.) But the fix wasn't what all those folks with compelling stories had in mind. Five months later, the first wave of condo owners — soon to be joined by others — filed their lawsuit in federal court, asking that their units be released from the BMR condo program, and that the program as a whole be dismantled.


How sorry should we feel for these people? Even if their homes are worth a few hundred thousand dollars less than they would like, the condo owners now suing the city are hardly among San Francisco's most desperate residents. Like the beneficiaries of any other government program, some might be trying to game the system. And there's little doubt that those honestly confused about their ownership rights were ill-served, as Shoemaker suggests, by a lack of financial savvy.

Nevertheless, Cincotta, the former housing director on whose watch the program began, thinks something went wrong here. The initial premise of the BMR Condo Conversion Program, he said, had nothing to do with creating permanently affordable homes. While it was one of the first nationwide to resemble the now-common practice of inclusionary zoning — whereby developers agree to set aside a fraction of units in new residential projects as permanently below-market-rate housing — Cincotta recalls that the BMR condo program had more modest and immediate goals.

"I think that's one of the things that's been missed," he said. "The big crisis was gentrification. ... I think our focus at that time was the focus of minimizing displacement, for that particular time, for that particular person. We had less concern about keeping it affordable permanently."

Rather than setting up punitively high buyout fees, Cincotta said, a more enlightened approach to modernizing the program would have been to modify the terms of the agreement between owners and the city along a "shared equity" model. Such programs already exist in San Francisco: Owners and the city share proportionally in the increase or decrease in a home's market value, according to their original levels of investment or subsidy.

"If either city or home-owner puts $75,000 into a property, that amount should increase or decrease as the value of the property increases or decreases," Cincotta said. "To me, that system is more equitable. The way the city system is now, the lower-income household is taking all the risk, and I think that's the problem."

Sitting with Phyllis Lund on a recent afternoon in front of her Goldmine Hill condo's gas fireplace, it does seem odd that this small corner of the world she has made her own should rest, after nearly 20 years, in the control of bureaucrats. Lund said she knew that her studio was a below-market-rate unit when she bought it for $96,000 — "I thought it was just a break for first-time homebuyers," she said — but was never informed of future restrictions: "I've kept every single paper. Nowhere did I have anything."

Ironically, Lund said, back in 1992 she considered buying a market-rate studio in the same neighborhood that cost only about $8,000 more, a pittance when spread out over the lifetime of a mortgage. But she preferred the layout of her Goldmine Hill condo, and as a result now essentially has $100,000 less than she would have if she had bought the comparable studio up the street.

Not that the question is just about dollars and cents. For Lund, who opted not to get involved in the lawsuit, there's something more personal involved here. Something about government skating from its responsibilities to those it claims to help, an impression that she and others like her are paying the price for an embarrassing saga of bureaucratic failure. "It's as if I'm the caretaker for the Mayor's Office of Housing for not doing their job," she said.

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