San Francisco's real estate boundaries are about to be shattered by the Park Lane building at 1100 Sacramento Street. The 33 units in the Nob Hill luxury tower are being converted from rentals into a tenancy-in-common project, and the projected sell out is a whopping $100M. The size of this building is nearly double that of the current largest TIC in The City: the Marina's Francisco Palms, which has 17 units. What does a TIC of this size and prestige mean for San Francisco's real estate market?
To be sure: 1100 Sacramento Street's conversion to TIC is a blatant move to circumvent the zoning and rent control laws that govern the building. This is, however, exactly what TICs were originally formed to do.
Although very similar in concept to Manhattan's co-ops, San Francisco zoning laws actually consider co-ops and condos to be of the same breed: a legal subdivision of property, which is largely prohibited throughout the city. Most buildings on the market are therefore forced to remain rentals rather than convert to subdivided ownership such as condos. On top of that, the thin profit margins afforded by rent control laws oftentimes precludes landlords from being able to maintain luxury amenities or improve a high-end property over time.
The owner of the property at 1100 Sacramento put it this way to San Francisco Business Times: "Rent control is fine for most of the buildings, but doesn't apply to a building like this, with 24-hour doormen. To keep a building like this properly maintained you have to raise rents 5 or 6 percent a year. And what do we get (under rent control laws), a half a percent? It doesn't make sense."
While Flynn may sound outrageously out of touch with the needs of the majority of renters in The City, local broker/attorney Kevin K. Ho helps put his words in perspective.
"Owners need to have incentive to offer a better product to tenants, but locked-in rents tamp that incentive down," Ho explains. "Imagine if we had market-hindering policies like rent control laws while San Francisco was being built in the 1800 and 1900s, most places probably would still have split bathrooms that use 6 gallons a flush with gas lamps for lights."
Beyond ensuring the quality of life in the building, 1100 Sacramento's conversion to TIC is also about inventory. Although some buyers are turned off by the notion of co-ownership, rather than buying a private slice of property, SF's luxury market is so tight right now that buyers may not have a choice but to accept a TIC. Ho puts it bluntly - but accurately: "If it's not 1100, it's nowhere. Scarcity controls."
Finally, 1100 Sacramento raises the issue of evictions. About 10 units remain occupied, and those tenants will have to either be bought out or evicted using the Ellis Act, which allows property owners to evict tenants from units that won't be rented out again for a minimum of three years. Although tenants-rights groups get very hot and bothered about Ellis Act evictions, their protests may fall flat when it comes to evicting tenants that were paying up to $10k/month in rent.
What the TIC conversion at 1100 Sacramento illustrates is the bigger picture of the extremities of San Francisco's real estate market: extreme government regulation and extreme polarization. Although the zoning laws, rent controls, and eviction protection have the good intention of leveling the market, 1100 suggests that they may in fact only be widening the gap between the affordable housing cases and the luxury developers.
· Coming to Nob Hill: San Francisco's first $100 million TIC [San Francisco Business Times]