Some commercial real estate agents rely on the razzle-dazzle of dollar signs to capture and hold a client’s attention, stretching projected property valuation to the limits of market tolerance. But big flashing dollar signs aren’t always the best tool for Building Great Relationships or delivering a great outcome. For veteran San Francisco office and investment advisor Barry Bram, commercial real estate is more like a game of chess; He sees the whole board and he’s always thinking two moves ahead.
Barry is known for his tenacity, vision and immersive understanding of local market conditions and influences – qualities he pairs with bracing honesty and directness. While dollar signs might initially catch a client’s eye, from Barry’s perspective, the real value of a transaction often lies in subtler rewards, like a strategic negotiation and smooth and uncomplicated escrow. Ultimately, you just have to weigh out all the variables.
When the long-time owners of 721 Brannan St. decided to sell, they perceived a lofty valuation influenced by the abundant development occurring in and planned for the nearby properties. This created a significant disparity between what the property “might” be worth and its realistic valuation due to restrictive development zoning.
The three-building property sits in an area with great potential expansion, right in the path of development, but use options are severely limited by an industrial zoning overlay. So as highly-profitable office, retail and residential developments spring up in the surrounding blocks, the redevelopment prospects for 721 Brannan were a little different.
To cash out their nest egg, the sellers were looking for an investor or industrial user willing to pay top price. So for a year, Barry marketed the property at the highest possible price looking for a user attracted to the area. But eventually, after counseling the owners through the process, they realized that the zoning would drive the value and not the other developments, albeit very nearby.
Once they decided to adjust the price point, Barry was determined to provide his clients with the optimal transaction process. After receiving several offers, some more credible than others, he shepherded the owners through the analysis of the terms and pursued a path for sale with a buyer who would perform without a hitch toward close of escrow.
In the end, they opted not to take the highest offer, but went with a buyer who had a proven record of performance. With no re-trading or unexpected delays, they proceeded to close without a hitch. The sellers were ecstatic with the results. They had the confidence of knowing the property had been fully marketed and the contract price was indeed the best the market would bear.
Award-winning San Francisco investment advisor Gary Cohen has a gift for unsnarling quirky puzzles in #CRE. His five-year quest to track down the owners of 500 Turk St. and acquire the property on behalf of his client, Tenderloin Neighborhood Development Corporation, is a prime example.
Through his work with TNDC, Gary is always on the lookout for potential sites for affordable housing development in San Francisco. The property at 500 Turk St. was perfect, but seemingly unattainable. It hadn’t been on the market in 50 years or more.
“Everyone in town had their eye on that property, but no one could figure out who owned it,” Gary said. An infamous tire repair shop, Kahn & Keville, had been there for decades, remaining virtually unchanged as the neighborhood modernized around it. It was clear that the current ownership was not aware of the potential of the property. An initial public records search revealed that it was held in a trust, but all the trustees had long since passed away. Gary’s interest was piqued.
“It was really a question of digging past the surface,” he said. “The rent had to be going somewhere . So, I decided to follow the money.”
For five years, Gary chipped away at the mystery, sifting through old records and circumventing dead ends until he found a 1953 trust document that led him to the former owner’s son. He’d inherited the property with his sisters, who also live out of state.
Once Gary managed to connect with the owner, it was a fairly uncomplicated transaction. His determined detective work paid off with a win for all the parties. TNDC got a great property for a new affordable housing project, and the owner transformed an under-performing asset and traded into a more conveniently-located East Coast property with a significantly enhanced return.
It’s like the saying goes, “Never stop trying. You’ll never know how close you were to succeeding…”
A detailed overview of the information covered by Andrew Rebennack in this video can be found in our our blog post, Navigating the Sublease Market.
Will an Incremental TIC Conversion earn you the most or your building?
Written by TERRENCE JONES
I recently sold a tenant-occupied building in a popular part of San Francisco. It was built before 1979 and was under rent control. The tenants in the building were combative and had many demands regarding buyer and broker access during the sales process. This process is never easy in San Francisco, but in this case, the tenants’ actions were far beyond what is usual. They called the Department of Public Health with complaints that resulted in multiple Notices of Violation. They posted signs indicating they were protected while demanding that they had verbal authorization to enjoy rights to areas not noted on the lease.
Perhaps they followed the San Francisco Tenants Union’s advice, which is posted on its website:
“The best thing to do is not worry about which just cause will eventually be used and fight the conversion. If the landlord can’t sell it, then no one will be evicted by a new owner. Start fighting the day a ‘for sale’ sign goes up. Potential buyers often have not thought through the fact that they will be evicting someone or evicting a family or someone who is senior or disabled. Nor have they usually thought through what it might cost in money and time to evict someone. They’re thinking and hoping that you will move out the moment they buy the building. Educate prospective buyers! Let them know they will be evicting people and what that will mean to those people, as well as what it will mean to the landlord’s pocketbook and time schedule. If you show that you will put up a fight, you can probably convince almost two-thirds of prospective buyers that they don’t want to buy your building, because it looks like a lot of hassle. And maybe you can slow down the process so much that the sale becomes unprofitable. Many tenants have fought their condo conversion evictions this way.”
The battle between owners and the city government over losing rent-controlled units has waged on for many years in San Francisco. The essence of the battle on the side of the owners is they want to cash out of their rent-controlled apartment investment buildings. Many of the buildings with fewer than 10 units are bought by investors who hope to vacate the units and sell them individually through a Tenants in Common (TIC) sale or a condominium conversion. On the other side of the battle are many of the Supervisors, tenant rights activists, and groups like the SFTU who see the TIC or condo sale of rent-controlled units as an erosion of their progressive voting base. The common position is that if owners exit the rental business through a TIC sale, those units that house voters in “distributed owner-subsidized housing, ” aka rent-controlled housing, will house owners who are less supportive of the progressive agenda. Once a tenant is replaced by a TIC owner who is directly responsible for payment of utilities and property taxes, the new households are more often prone to be more conservative in their voting preferences. Our Supervisors have not, as a group, been on the conservative side historically.
Some of the highlights of recent skirmishes include:
2013 Condo Conversion Moratorium
In 2013, the San Francisco Board of Super visors suspended the city’s condominium conversion lottery scheme until 2024.
Currently, the only properties allowed to convert are 2-unit buildings and larger buildings that were already TICs in 2013. Condos are a superior form of ownership of units versus TIC ownership when it comes to individual loans. This redirected the efforts of would-be converters only to TIC ownership.
2014 San Francisco Ordinance No. 54-14 (aka 24-Month Payout Differential)
This legislation, proposed by David Campos, required property owners to pay the difference between a tenant’s current rent and two years’ rent for a similar apartment when evicting them using the Ellis Act.
This was signed into law in 2014, but later overturned in a court decision by the First District Court of Appeal in 2017.
2015 Buyout Registration No. 37.9E
In 2015, the Supervisors adopted a mandatory disclosure and registration of owners who execute buyout agreements. The legislative findings stated in support of this ordinance reads as follows: “Anecdotal evidence indicates that many buyout negotiations are not conducted at arm’s length, and landlords sometimes employ high-pressure tactics and intimidation to induce tenants to sign the agreements.” The registration process is meant to regulate and count all buyouts to move them from “anecdotal evidence” to a clear count with the names of the owners, but not the tenants, published.
2017 Owner Move-In Ordinance
With this new law, owner move-in evictions have become more regulated. The period when the unit cannot be rented at a market price has moved from three to five years.
Tenant activists and private non-profits now can directly sue owners who do not follow the new rules, and the damages can be up to triple the rent differential, plus legal fees that a tenant incurs after an alleged wrongful owner move-in. These damages, most landlord attorneys feel, will be excluded from most insurance coverage.
As each side attempts to advance or de fend its respective position, the battles become more focused. Despite multiple attacks, the Ellis Act continues to be one of the few options for owners to escape rent control because it is a state law and supersedes local authority to some extent. (Municipalities like ours still get to enact onerous regulations to impede use of the Ellis Act.)
Incremental TIC Conversion
One process that has been quietly progressing without much battle is the incremental conversion of buildings to TIC ownership. The most common TIC conversion strategy in San Francisco is to vacate the entire building through the Ellis Act or buyouts, renovate the building completely, then sell the units individually as TICs. In an “Incremental TIC Conversion,” an owner can simply sell units as they naturally vacate, when a tenant moves out voluntarily, which requires no notification to the city or regulation of the unit by the city’s governing agencies.
Andy Sirkin, an attorney who authors many San Francisco TIC agreements, noted, “If a new TIC owner is willing to be a co-owner with a landlord who still has under-market tenants as their responsibility, then this can be mutually beneficial without the stigma of Ellis or buyouts.”
In a conversation I had with another well-known TIC attorney, Lyssa Paul, she explained, ”As property owners are reviewing their buildings and considering options going forward, one consideration is selling interests as tenancy in common through natural attrition of tenants. In fact, some tenants may even be interested in purchasing the occupancy rights to their units. This avoids the issues associated with potentially evicting/buying out tenants. It does require forethought depending upon the building size and financial situation, but is worthy of evaluation. The fact that tenants remain in place does not necessarily eliminate the possibility of tenancy in common interests. The location, type of property and amenities will influence whether prospective buyers will be deterred by units being tenant occupied.”
I spoke with a client last week who had a 6-unit building in the Sunset District with a very good location near the retail shops, good public transit and Golden Gate Park. He said he has been selling units as they vacate. He is now holding the last one of the six units. In that unit resides a tenant who pays 40% of market rent, but even that tenant cannot live there forever. He commented on the state of rent control in San Francisco. “I was born and raised in a communist country. I left that country and came to San Francisco. Some of the rent control aspects I see remind me of communism. We had a saying in the old country that seems to apply to tenants’ manipulation of the laws. My last remaining tenant really ‘knows how to dance the dance’ of rent control.”
Another owner I spoke to did an incremental conversion a few years ago with a larger building in the upper part of the Tenderloin. He owned his 30-unit property with no debt and one next door of similar size. He was able to move many of his tenants into one of the buildings with no buyout or Ellis Act, and then could sell the units in the vacant building. This movement without Ellis Act, buyout, or owner move-in eviction was a smooth transition that eventually emptied the building.
Who is to say where the Incremental TIC Conversion strategy will end up in this ideological battle, but one thing is for certain: If enough owners utilize this strategy, it could have a serious impact in the market, causing the Board of Supervisors to focus on the issue and try to regulate it. So far, it has escaped their watchful eyes.
Terrence Jones is a senior broker associate with TRI Commercial and specializes in the marketing and sale of investment properties. His business specialty is San Francisco rent-controlled apartments. He has extensive experience with properties with special circumstances. He can be contacted at 415-786-2216 or by email at tjones@tricommercial.com.
Published by the SF Apartment Magazine. Download the article here.
Too Good To Be True? Navigating the Sublease Market
By: Andrew Rebennack
Looking for office space? Chances are you’ve come across the term “sublease.” It may seem like a great deal, but is it? Could your business benefit from a sublease? What does it really mean and what are the risks lurking in the fine print? Unfortunately, there’s no one-size-fits-all answer for these questions. While every tenant has a unique set of circumstances, there are some key pros and cons to consider.
The Pros
The Cons
As you can see, there’s a lot to consider. The attributes of a sublease that benefit one company could be a significant liability for another. A leasing specialist can help you navigate the market and find the right s[ace. If you have questions or are actively looking for office space, give us a call–our expert services come at no cost to you!
Learn more about my practice here.
Andrew Rebennack, Sales & Leasing Associate, BRE# 02025935
On Monday, October 16th, TRI entered the rink as the 1st Annual Brokers Skeeball Tournament kicked off. Alongside other brokerage firms including Urban Group, Colliers, Paragon, and more, the night was full of camaraderie, connecting, and of course–a bit of healthy competition. Though Urban Group took the win this time (and in quite the dramatic fashion) you may rest assured that we will be back at it with our A-game next year for Round II of these festivities.
As prepared to you by your friends at: TRI Commercial / CORFAC International
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