Starboard Commercial Real Estate

Hans Hansson | April 7, 2017

Permit Delays in San FranciscoI was recently handling a retail listing in the Sunset District in San Francisco that had been vacant for over a year before I took over the listing. The owners said the space received interest, but could not secure a tenant.

The space was previously rented to a title company, but when I took over the listing, the only interest I could secure was from businesses that involved some type of food-use. All over San Francisco's districts, but particularly the Sunset district, there are either moratorium of additional food uses or a requirement that food uses need a variance from the city before a permit can be issued.

In my client's case, I secured an offer from a couple that wanted to open a Taqueria. The tenant had worked in her family's Taqueria for years and decided she wanted to open one of her own. This was a very typical "mom and pop" business. They had just enough funds to do some required improvements and get the business up and running. This couple didn't have prior experience or knowledge of dealing with the city's permit process and didn't realize the length of time it would take to secure the necessary permits before they could open their doors and start making money.

I recommended that they first secure an architect who could handle not only designing the restaurant, but also address the requirements from the city that they will need to pass. The essential cost would be around $5,000. My client confirmed that although the proposed Taqueria was of legal use for the premises, that the variance process would take them a minimum of 4-6 months before they could even know if they will be accepted. The variance requires a posting and a notice circulated to the neighborhood, plus a hearing to determine if there is any neighborhood opposition to this use.

The tenant was clueless to this process and the costs associated with getting approval through the variance was unknown until they could learn if any neighborhood opposition existed.

The landlord was willing to wait four months before he would expect rent, however once permits are secured, the build out alone would take another four months.

The tenant was very excited about the possibility of opening their own Taqueria. After tasting their food and her reviewing her business plan, I believe they would have been a very successful business. Unfortunately, the couple decided to pull out of the deal and the space remained vacant for another six months until the owner decided to take the space back himself and put his own restaurant in there. The process took another year before the owner secured the necessary variance and built out the space. It took another 18 months before the neighborhood saw a vacancy released.

In this case, there was only one vacancy on the block. However, we see many blocks throughout the city with numerous vacancies on one block. Vacant spaces are detrimental to any neighborhood. They lead to foot traffic gaps, which impact neighboring businesses, taking away potential sales.

The challenge is that the city's authorities know this is a problem– our mayor, board of supervisors, neighborhood groups, and the Chamber of Commerce. All receive the same complaints, express sympathy, yet there is still no action.

Retail is being threatened with the competition of online stores, and continuously challenged with high costs of labor, lack of labor, rising delivery costs, and the lack of customers– which is a result of the lack of foot traffic that once populated retail blocks. We need leadership to take charge and streamline the permit process before all our neighborhoods fall into blight.

Photo Credit: sea turtle Flickr via Compfight cc


Starboard TCN Worldwide Commercial Real Estate | October 8, 2014

Cash FlowDo you own commercial property? Here’s how you can improve your cash flow using cost segregation (CS).

What is Cost Segregation?
Cost segregation is a tax savings tool that allows companies to identify and qualify assets for accelerated depreciation.

How Does it Work?
Accelerated depreciation allows a company to reclassify assets. When you accelerate the depreciation on these assets, you are eligible to increase cash flow and defer federal and state income taxes. While most organizations focus on furniture and assets that depreciate over five years, accelerated depreciation goes far beyond that by dissecting costs that are depreciated over 39 years.

Some common assets include cabinetry, dedicated electrical, dedicated plumbing, and millwork. Other assets include oversized fans, range fans, landscaping, curbs, sidewalks, parking lots, and more. Several commercial properties are packed full of these assets, opening a large area for accelerated depreciation. These savings generate substantial cash flow that owners often use to reinvest in their business, purchase more property, apply to their principal payment or can freely spend on themselves.

How to Get Started
Cost Segregation Services, Inc. (CSSI) is an experienced and qualified company, which performs IRS defined engineering-based cost segregation studies as an essential tax savings tool for commercial property owners. The study accelerates the depreciation of a building or renovation components into shorter depreciation categories such as three, five, seven, or ten years rather than the conventional 27.5, 31.5 or 39.5 years schedule.

Know What Assets Qualify
What can be included in these accelerated programs using five to seven years schedule includes decorative building elements, electrical for dedicated computer equipment and even carpet.

15-year items could include site utilities, landscaping and paving. This IRS- defined engineering based cost segregation study results in much higher depreciation expense and significantly reduced taxable income for the property owner. Best of all, the IRS ruling states that cost segregation can be applied to categories of buildings purchased or built since 1986, including renovations, and there is no need to amend your tax returns.

The landlord or building owner often times are not aware of what items qualify for accelerated depreciation. Therefore, missing the opportunity to capture sizable tax savings when they renovate the space for the next tenant or contribute to build out costs for the tenant, who are commonly capitalized. Working with CSSI, a landlord can help them identify write-down costs for the value of materials disposed and provide a new schedule that will identify the landlord’s costs by the tenant.

The tenant using CS can properly classify assets by costs, which then can be applied to the proper party (either the landlord or the tenant). If the tenant is funding a remodel or expanding the space, this process can help the tenant show them how to enhance their cash flow through the accelerated depreciation deduction that CS can deliver.

Example of Savings
Here is an example of savings. Let’s say you made leasehold improvements for an office tenant of $1.4 million. The first year tax savings by accelerating your costs over five years is $131,569.

If you are interested in learning more about how cost segregation can help improve your cash flow, visit www.costsegserve.com.

Photo Credit: kenteegardin via Compfight cc


Hans Hansson | September 9, 2014

Debt Service Coverage Ratio (DSCR), otherwise known as the debt coverage ratio (DCR), is one of the main tools that lenders use when deciding whether to make a particular loan.

A simple example of how DSCR is calculated is:

Net Operating Income / Total Debt Service Costs

In other words, this ratio compares a company's available cash with its current interest, principle, and sinking fund obligations. The debt service coverage ratio is important to both creditors and investors, but creditors most often analyze it. Since this ratio measures a firm's ability to make its current debt obligations, current and future creditors are particularly interest in it.

Unlike the debt ratio, the debt service coverage ratio takes into consideration all expenses related to debt including interest expense and other obligations like pension and sinking fund obligation. In this way, the DSCR is more telling of a company's ability to pay its debt than the debt ratio.

The debt service coverage ratio measures a firm's ability to maintain its current debt levels. This is why a higher ratio is always more favorable than a lower ratio. A higher ratio indicates that there is more income available to pay for debt servicing.

A ratio that is above 1/1 would show that the borrower has excess income to meet continuing obligations, plus the payments any loan that the lender is contemplating giving. A ratio below 1/1 would mean that there is not enough income to support the proposed debt, along with existing obligations.

A vast majority of lenders describe themselves as “cash flow” lenders. These lenders would include pretty much all the banks, credit unions, life Insurance companies, etc. In order to get a loan from a cash flow lender, a ratio in excess of one is a requirement.

Most borrowers who find themselves with a DSCR below one end up with a private money loan. This is often called "Hard Money" and rightfully so as the rates and fees are significantly above that of a cash flow lender.

Different banks have different DSCR requirements and depending upon the specifics of any transaction, the required DSCR could be higher or slightly lower. Generally speaking, those lenders that offer the lowest rates would like to see a higher DSCR than those lenders with higher rates. Not always, but in general the lower the rate the harder it is to get the loan. It is a reasonable assumption that most national banks look for a DSCR approximating 1.25/1 at a minimum.

Occasionally a Small Business Administration (SBA) lender will consider a loan to a borrower who has existing financials that show a DSCR below 1/1 if the borrower has a reasonable projection and can show the ability to make loan payments. An example of this would a business that purchases a property to expand their existing business. The income to pay the loan will come from the new location and would not be shown in existing financials.

With investor properties, some lenders look at two DSCRS– one for the property being lent upon and another that would include the property and the borrower.

The DSCR for the borrower and the property is known as the Global DSCR or Global cash flow. The common practice is for a lender to require a Global DSCR to be slightly higher than the property DSCR. An example would be if the DSCR for the property were 1.25/1, a lender would also like to see a global DSCR of 1.35/1. When dealing with owner user real estate the global cash flow is the only relevant DSCR. There are some exceptions to this rule, but they will cost money.

Why this is important

The debt coverage ratio impact a borrower's ability to get a loan at reasonable terms and conditions. Private money rates can be at least three percent higher than conventional rates and usually significantly more.

What you can do about it

  1. Prior to applying for a loan pay off all your credit cards. Banks often take a percentage of your total balance and add it to your total debt service. This amount varies from lender to lender but can be up to three percent per month of your total balance. For example, if you have $10,000 in credit card debt, a lender would assume $300 in monthly payments.
  2. Buy or refinance your commercial real estate before you make any purchases that require monthly payments. Every dollar in monthly payments that a borrower has is added to the denominator.
  3. To the vast majority of lenders the most important year for the DSCR is the last year that they have tax returns or audited financial statements. So, if you are planning on purchasing or refinancing commercial real estate in 2014, you want your 2013 taxes to look good even at the expense of a prior year's tax return.

Note for Investor Properties

  1. Be sure to review all your expenses for the previous years. If there are any expenses that are one-time expenses not to be repeated you should notify the lender as this money could be added back to your cash flow.
  2. Try to time any leases so that they do not expire shortly after your loan term ends. There are two reasons for this:
    a. Banks like to see a long-term cash flow when making a loan.
    b. Hopefully the current income for the property will be higher than the previous income.

Hans Hansson | July 9, 2014

Spces for Conventional TenantsIt's no surprise that San Francisco's marketplace is currently the "hottest" office market in the country. Tech is the name of the game and office vacancy rates have dropped to mid-single digits, in which rental rates have gone up forty percent and higher since 2010.

If you are a 'conventional' tenant (a law firm, accounting, architectural, or a non-profit) and your firm has been around for a number of years in San Francisco, and you have a lease coming up within the next six to nine months, then get ready to be "truly shocked." Your current building will be looking for a renewal. If you would like to stay, you are going to be faced with limited options. You may either pay a very high, increased rent or you may decide to relocate outside the city.

Gone are the days when you signed your last lease five years ago, and when you started your search or renewal with your landlord six months to one year ahead of your expiration date. Back then, you had time to plan a new build out and the landlord was more than willing to offer you free rent and a relocation allowance.

Today, the tech tenants whom these conventional firms are competing against are seeking to move in to spaces within 60 days or less. They want an open plan office space as soon as they can sign the lease and are willing to pay the landlord's new rental prices.

So how do conventional tenants compete and protect themselves if their lease is expiring soon?

1) Use a Professional:
First, you truly need to hire an experienced commercial real estate broker who understands the "lay of the land". Today, you have young brokers working tech deals that have no idea what a conventional tenant is going through and what steps they need to take to survive this current upswing cycle. The landlord employs the brokers. Therefore, at no extra cost to you, these brokers can either to help you in securing a new space or aid in the process of your lease renewal.

2) Know the Landlords:
Next, you need to understand that unless you are 10,000 square feet or larger a building owner is not interested in leasing you space nine months from now at a locked in rent. Furthermore, landlords are not interested in building out new conventional space. It is more costly on their end to do so and most don't have the patience to put time and money into a space redesign, just to meet the desires of potential tenants.

3) Know Where You & Your Competition Stand:
Conventional tenants are going to have to seek spaces that are already built out, requiring minimum tenant improvements. Today, paint and carpet in a Union building could cost as high as $20.00 a foot. Today's landlord for conventional tenants may offer $20.00-$30.00 for a new five-year lease, if you're lucky.

If you cannot afford the expected rents, then you will need to seek solutions that may hurt. You may need to relocate to outer areas of the city such as Jackson Square, the North Waterfront, or Van Ness Avenue, all of which prices have also jumped, but not as high. Some companies will have to consider a major downsize and/or a different office design in order to accommodate a more mobile office environment with a more open plan. Others will have to look at outlining markets such as Oakland, the South San Francisco market or Marin/San Rafael area to survive.

Here are a couple things you need to compete.

1) You are OK with longer leases:
Firstly, you are probably OK with a new five to ten year term. Most tech firms struggle with lease terms over three years. However, there is a gamble here. If this is a fluctuating cycle, you could be caught with rental rates far higher than the market place in the next three to five years. An experienced broker will tell you that this can be mitigated later by subleasing your space and allowing you to move potentially into larger and better space in the future by blending rental rates together. You will still be higher than the tenants seeking space, but still lower than you would be paying now under a brand new lease.

2) You have a good track record:
Your credit is based on profit (hopefully) with a track record. Most tech firms have no track record, are not profitable, and are not bankable without large security deposits.

The best thing for any conventional business owner is to educate yourself before you make any offers. Understand that this market is a lot like residential and you will need to make offers quickly, while having your finances buttoned up and ready to present with your offer. You will also need to understand your new office may or may not have everything you are looking for, but grab it while you can. This market is booming!

Photo Credit: Jeffrey via Compfight cc


Hans Hansson | March 28, 2013

In 2011, San Francisco passed a retail ordinance requiring any chain retailer with more than eleven stores to undergo a special review process in Neighborhood Commercial Zoning Districts to determine whether or not the retailer is a good fit for the neighborhood. The purpose of the ordinance is to foster the growth of local markets and retailers while preventing large chain retailers from edging out smaller businesses and creating uniformity in unique neighborhoods. In addition to this new ordinance, neighborhoods have long created restrictions to reduce the amount of restaurants, financial services and other retailers deemed capable of creating a negative impact on a particular San Francisco neighborhood. Both of these restrictions have seriously impacted neighborhoods while creating a negative impact on commerce tied to new store growth. As a real estate broker I have seen first hand how out of touch these ordinances really are – not necessarily in terms of what they are trying to accomplish but in the long delays that retailers must face when going through the application process.

When a chain retailer decides to enter a neighborhood within an NC Zoning District, it is easily a six month to one year or more process simply to find out if their business will be deemed acceptable or not. This means that the space will remain vacant during that entire time period – causing any landlord to lose rental income. The same situation occurs with any change of use: For instance, if I want to put a food use into a retail space that previously did not serve food, I have apply through a notice process to the neighborhood that could take ninety days or more just to find out if I can secure the location or not.

I am not proposing a change to either the 11-store rule or the requirement to seek neighborhood input for change of use. I am however, proposing streamlining the timeline to something that is more realistic. It shouldn't take two weeks or more to post a 30-day notice and then another 30 days wait for approval and a retailer shouldn't have to wait six months to a year for approval. The consequences of these long waits and loss of income affect many people. When I arrange a lease for someone, I get paid when a lease commences. A contractor and architect are paid upon completion of work. The landlord is paid rent and a retailer can begin hiring when the shop doors are ready to be opened. Finally, the government can start collecting taxes when work commences. This issue effects a wide range of service providers and vendors who won't benefit from leases until approval requirements are met and doors are ready to open.

Mayor Lee and the Board of Supervisors need to take note of just how lengthy the NC Zoning District approval process is and work to streamline the process. If this priority is seen to, jobs will be created sooner and neighborhood vacancies will be kept lower – benefiting retailers as well as the neighborhood.

Starboard TCN Worldwide Commercial Real Estate | December 20, 2012

On December 6, 2012, the Planning Commission voted 7-0 to adopt the Western SoMa Plan. The Plan was approved with certain changes discussed below.

Of most significance to owners and developers, the Commissioners voted to create a new "Western SoMa Mixed Use - Office District ("WMUO)" along and around Townsend Street. WMUO encourages office uses, small-scale light industrial and arts activities; allows nighttime entertainment; and prohibits new residential uses. This area is just north of the Caltrans station, along many MUNI lines, and the location of the new 4th subway line. This change is consistent with the City's direction to create density and locate office uses along main transit lines to encourage public transit use and discourage commuting by car. Commissioners voted to grandfather a 24 unit residential project at 340 11th Street while rejecting requests to grandfather other projects in the pipeline.

Also of great significance, the Commission voted to allow more flexibility in uses within historic buildings within most Western SoMa zoning districts. Currently, many such buildings are located in zoning districts that do not allow office space. The change now allows office space in such districts as long as a building is either (1) individually eligible for the California or National Register; or (2) already on such Registers; or (3) qualified under Article 10 of the Planning Code as a City Landmark; or (4) currently designated in Article 11 of the Planning Code as Category I-IV. This exception to the zoning to allow offices is slightly narrower than a similar one existing today in the so-called Eastern Neighborhoods: in those zones, buildings that are eligible to be called "contributory" to an historic district also get the benefit.

Commissioners also voted to rezone a portion of 11th Street between Harrison and Folsom Streets (and two lots across Folsom) to (WMUO). In addition to allowing office, this change will allow existing nighttime entertainment uses in this area to continue and to allow new ones, although no new ones can be established within 200 feet of a Residential Enclave District (RED). The Plan also allows current entertainment uses which are demolished to be rebuilt as entertainment uses, even if they are in districts that no longer allow this use.

The Plan also creates the Folsom Street Neighborhood Commercial Transit District (Folsom NCT) which supports residential and neighborhood serving retail and other commercial uses, and a Regional Commercial District (RCD). The latter applies to 9th and 10th Streets and allows larger scale uses which will accommodate the many furniture stores and other regionally focused retail in the area. A Service Arts and Light Industrial Zoning District (SALI) south of Harrison will prohibit new offices (even in historic buildings) but will allow new large entertainment venues and limited live performance venues.

By a 4-3 vote, the Commission recommended that the Planning Department explore creating a process to allow legalization of office use in the limited locations where it has been legal before the Plan passage, so that owners who may not have ever obtained alteration permits legalizing the space as "office" can do so now. A similar legalization program, known as "amnesty" or "legitimization", was in effect for the areas within the Eastern Neighborhood Plan and that amnesty period was in effect for three years after that Plan adoption.

The legislation now moves to the Board of Supervisors for approval, and some tinkering by the district's Supervisor Jane Kim may occur. It is anticipated that the Mayor will sign thereafter.

Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com


M. Brett Gladstone

B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR
Board of Directors, Museum of San Francisco at the Mint

Susanne B. Kelly

B.S. 1994 Santa Clara University
J.D. 1997 University of San Francisco School of Law
State Bar, Real Property Section Member

Melissa L. Vancrum

B.S. Business 1997 University of Kansas
Master Urban Planning 2011 University of Kansas
J.D. 2011 University of Kansas
Bar Association of the City of San Francisco, Real Property Section Member

Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.

Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.

This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com

Hans Hansson | December 12, 2011

REZONING OF LOTS IN EASTERN NEIGHBORHOODS HAS MADE ILLEGAL AT LEAST A THOUSAND RESIDENTIAL, OFFICE AND RETAIL SPACES.

LEGALIZATION APPLICATIONS MUST BE IN SOON.

Until the middle of January 2012, there is an opportunity to legalize uses being conducted without benefit of permits. After this time, Planning Department enforcement will begin.

Two and a half years ago, over 1,000 lots on the eastern side of th City, which allowed a wide assortment of uses including residential, office and retail, were rezoned to industrial only (PDR).

WHAT ARE DEEMED ILLEGAL USES THAT HAVE TO TERMINATE?

The rezoning has made existing uses (office, retail or residential uses) in PDR districts into either "legal" nonconforming ones or "illegal" non-conforming ones. Illegal ones are those without permits which explicitly call out the use as office (and can show a "change of use" from industrial to office approved by Planning Department). This article deals with the office uses created without permits, but the rules apply to retail, residential, and other uses.

Those uses that are legal may continue indefinitely as long as (1) the alteration permits by which they moved in indicate on them that the proposed use is "office" (2) there is no physical expansion or intensity of use, (3) there is no period of office vacancy for three or more years, and (4) there is no change of office use to a PDR use in the future.

WHY LEGALIZE AT ALL?

Many owner and tenant alteration permits may be challenged by those political groups who want the Eastern Neighborhoods to become mostly industrial, and revert from "illegal" office use to indistrial use. Many owners and tenants left the submittal of alteration permits to contractors, who may have filled in the "proposed use" box in an alteration permit in a wrong way. Also, in the dot-com boom, the immediate needs for office space were so intense that owners may have placed tenants in spaces without going through the lengthy San Francisco permit approval processes. If selling or refinancing without this problem solved, there could be problems; and those buildings which legitimize will increase in value more than those which do not.

Any City determination to allow legalization (or not) can be appealed to the Board of Appeals.

The legitimization procedure can be used to legalize office, retail or residential space in new industrial only (PDR) areas that no longer allow such uses. The only thing you cannot legalize is live work space without benefit of permits.

SINCE LEGALIZATION IS EXPENSIVE, IS THERE AN ALTERNATIVE?

One can ask one's experienced land use advisor to prepare a Request for Letter of Determination requesting that the Zoning Administrator concede that some permits which do not explicitly call out a use as office in fact created a legal office use nonetheless. These Requests (which ask the City to determine that legalization (and its fees) is not needed) should be submitted as soon as possible, since a negative response coming from the Zoning Administrator which arrives too late can cause one to miss the legalization application deadline of January 19, 2012.

WHAT IF LEGALIZATION IS IMPOSSIBLE?

If for certain reasons a particular space cannot be legalized (for example, the user of the space has moved in after 2007 or 2008), there is another possibility for either a brand new user or tenant, or an existing one. If one has a combination of PDR space and office space (even where the office space is as much as 2/3 of the space), one can seek approval as an Integrated PDR Space ("IPDR Space"). The City has decided to allow this for only certain kinds of older buildings, and may extend it to other buildings once the City determines the success of this.

Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com

M. Brett Gladstone

B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR

Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.

Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.

This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com

Hans Hansson | October 27, 2011

Most people think of "group housing" as a residential use in which a non-profit owns a building and rents furnished rooms (at very low prices) on a week to week basis to the economically disadvantaged, and/or those transitioning out of drug and alcohol addiction programs or out of jails. Indeed, most group housing does fall into this category. However, the Planning Code does not require that group housing be occupied by such persons. The growing price of rental apartments and the increase in the number of single young people migrating to the City for new jobs have led market rate group housing to start to appear.

This newer version of group housing has shown a great appeal to persons who do not want to sign a year's lease for many reasons; it has appeal to: (1) those for whom a long term hotel stay is expensive, and thus want to rent only week to week; (2) those who abhor the idea of roommates (especially strangers found by roommate services) yet cannot afford their own full apartment; (3) students for whom dorms are not available and who would otherwise room with other students and take up family sized dwelling units (4) those who are relocating to the City and do not wish to move all their furnishings somewhere until they live in the city a few months (and decide the right neighborhood in which to lease an apartment for a longer term); and (5) those who are coming to the City for specialized care at Kaiser and UCSF who wish to rent weekly because they do not know, at the beginning of a long treatment plan, how long the treatment will last. For all these persons, a week's stay in a furnished room is cheaper than renting a hotel for a week or month. These group housing opportunities are often found in older residential neighborhoods which, unlike some lower income areas, have decent neighborhood-serving retail and restaurants.

Market rate group housing rooms can provide good income to a landlord, especially since tenants may pay a little more per square foot for the flexibility of being able to stay weekly. There are also non-financial benefits, as the landlord will now have more control over each tenant to make sure each one pays, keeps spaces clean and treats other residents well, since the landlord has a separate lease with each tenant and can enforce the rules separately against an offending tenant without holding an entire roommate group responsible. While the rooms may be more expensive to a renter on a per night calculation than paying rent to a landlord as part of one roommate group and one lease, renters in these buildings can obtain free utilities, cleaning services, full furnishings and other amenities that would otherwise not be free. It is good for groups of friends as well. They can live all on one floor, but not worry that one or two of them will skip town and leave remaining roommates on the hook financially and with a poor credit rating.

The Planning Department will always be justifiably concerned that it is difficult for it to monitor when group housing with weekly rental turns into a hotel providing nightly stays. For example, people who only rent a furnished room for a week or two will, much as nightly tourists do, enter and leave only with clothing in suitcases. In a recent case before the Planning Commission where neighbors filed a request for Discretionary Review to oppose group housing, our law firm reassured anxious neighbors and Planning Staff that nightly rentals would not occur by suggesting that the client keep (and make available to neighbors and the Planning Department) daily records of who stays and how long, so monitoring would be easier, even though group housing does not require such monitoring (unlike SRO housing, which does). The Planning Commission then approved, after a Planning Staff recommendation of approval. A curious aspect of this recent neighbor-initiated hearing (for a use that did not require a hearing), is that some opposing neighbors complained that the use would overly gentrify the area but other neighbors complained that the group housing would lead to "the wrong kind of transient resident" and thus would cause blight to the neighborhood. It's been said that when two parties strongly disagree, and a third party imposes on them a decision those parties equally dislike, perhaps the third party has done the right thing.

How is group housing different from SRO hotels? Single room occupancy hotels (SRO's) are limited to those buildings or dwellings that were rented for a period of one week or less at the time rent control first went in during 1979. They are highly regulated by the City, and have low income residents, and the owners must send in extensive documentation to the City of who stays and for how long.

How is group housing different from a market rate dwelling unit? Under the Planning Code, group housing is a room for sleeping (with or without bathrooms), but without an individual kitchen; and a landlord has a direct lease with the occupant of each room. Unlike the rental of full dwelling units (units with kitchens and full bath), they can be rented by the week as well as by the month. If the landlord is not living in the unit, rentals of a room by the week are allowed only if the use is established as "group housing" under the Planning Code and under the Building Code. Otherwise, the only instance in which a landlord can rent a room by the week is one in which the landlord is occupying a room and leases out the other rooms to friends or strangers, as roommates. Fortunately, this use is allowed as of right in most residential neighborhoods and neighborhood commercial and other zoning districts, without Planning Commission approval. Landlords often give tenants separate spaces for storage in a communal kitchen where they may stash their own food, and separate storage areas.

Under the Rent Ordinance, "rooming and boarding houses" are not "rental units" unless occupied by an occupant for 32 consecutive days. Once occupied for 32 consecutive days, the occupied group housing room becomes a "rental unit" and subject to the regulations of the Rent Ordinance.

Under the Building Code, group housing at market rate and group housing owned by non-profits must upgrade the buildings in the same manner, but the upgrades are often inexpensive. Under the Building Code, "group housing" triggers extra exit signs with lettering (6 inches in height) on a contrasting background; identification of guest rooms by name, letter, or number; locking clear plastic covers over heater thermostats; and self-closing doors for each guest room and kitchen. And the building may be more often inspected by the Housing Inspection Services Bureau of the City than the typical apartment building in the City.

Is it difficult to find a building with the right zoning? The San Francisco Planning Code is quite permissive, as it allows group housing to be created as a matter of right in most districts (that is, without a special hearing/permit before the Planning Commission). There are two exceptions: group housing is not permitted in RH-1 (one family) districts; and requires a conditional use permit in RH-2 and RH-3 districts.

Older existing apartment units are not required to have a great deal of outdoor space, as the requirement did not exist when they were built. However, when one converts a building or a dwelling to group housing, the outdoor open space requirements of today for group housing kicks in. The Planning Code does require that group housing units have a certain amount of open space per room, and that is not always present in a building whose apartments were built well prior to the date that an open space requirement went into effect for new dwelling units in the City. This open space can be provided in balconies, on roof decks, on the top of garages, or in open rear yard. If not enough can be provided, one can ask for an open space variance from the Zoning Administrator in the Planning Department.

Except for properties within the RH-2 district, there is no parking requirement for group housing; in the RH-2 district, the requirement is only one space for every three bedrooms or for every six beds, whichever results in the greater amount.

Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com


M. Brett Gladstone

B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR

Susanne B. Kelly

B.S. 1994 Santa Clara University
J.D. 1997 University of San Francisco School of Law
State Bar, Real Property Section Member

Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.


Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.

This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com

Hans Hansson | September 15, 2011

AMNESTY PERIOD ENDS JANUARY 2012

RECENT REZONING OF LOTS IN EASTERN NEIGHBORHODS HAVE MADE ILLEGAL AT LEAST A THOUSAND RESIDENTIAL, OFFICE AND RETAIN SPACES WHOSE ALTERATION PERMITS ARE NOT CLEAR.

Two and a half years ago, almost 1,000 lots formerly zoned M-1, which allowed a wide assortment of uses including residential, office and retail, were rezoned to industrial only (PDR).

WHAT ARE DEEMED ILLEGAL USES THAT HAVE TO TERMINATE?

The rezoning has made existing office uses (or retail or residential uses) in PDR districts into either "legal" nonconforming ones or "illegal" non-conforming ones. Illegal ones are those without Building Department permits which explicitly call out the use as office (and can show a "change of use" from industrial to office that has the words approved by Planning Department). Notices have gone out to 7,000 owners recently telling them this. If the uses are illegal, enforcement by the Planning Department will commence January 19, 2012. Those that are legal may continue indefinitely as long as (1) the alteration permits by which they moved in indicate on them that the proposed use is "office" (2) there is no physical expansion or intensity of use, (3) there is no period of office vacancy for three or more years, and (4) there is no change of office use to a PDR use in the past or at any future time.

WHAT IS THE JANUARY 2012 DEADLINE ABOUT?

If an occupant of a space has moved in without benefit of permits and has been in the space for more than two years as of January 19, 2009, the occupant or owner will have until January 19, 2012 to legalize by paying a fee of $10.50 to $12.50 per square foot. Any City determination to allow legalization (or not) can be appealed to the Board of Appeals.

The legitimization procedure can be used to legalize office, retail or residential space in new industrial only (PDR) areas that no longer allow such uses. The only thing you cannot legalize is live work space without benefit of permits.

SINCE LEGALIZATION IS EXPENSIVE, IS THERE AN ALTERNATIVE?

One can ask one's legal advisor or other consultant to prepare a Request for Letter of Determination requesting the Zoning Administrator to concede that some permits which do not explicitly call out a use as office in fact created a legal office use nonetheless. These Requests (which ask the City to determine that legalization is not needed) should be submitted as soon as possible, since a negative response coming from the Zoning Administrator which arrives too late can cause one to miss the legalization application deadline of January 2012.

WHAT IF LEGALIZATION IS IMPOSSIBLE?

If for certain reasons a particular space cannot be legalized (for example, the user of the space has moved in after 2007), there is another possibility, at least for a brand new user or tenant. If one is moving into a space for the first time and has a combination of PDR space and office space (even where the office space is as much as 2/3 of the space), one can seek approval as an Integrated PDR Space ("IPDR Space"). For very small spaces, even a lesser percentage of the square footage must be PDR. The City has decided to allow this for only a limited number of older buildings, and may extend it to other buildings once the City determines the success of this.

WHY LEGALIZE AT ALL?

Many owner and tenant alteration permits may be challenged by those political groups who want the Eastern Neighborhoods to become mostly industrial. This may start after January 2012. This is because most owners and tenants left the submittal of alteration permits to contractors, who may have filled in the "proposed use" box in an alteration permit in a wrong way. Also, in the dot-com boom, the immediate needs for office space were so intense that owners may have placed tenants in spaces without going through the lengthy San Francisco permit approval processes.

Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com

M. Brett Gladstone

B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR

Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.

Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.

This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com

Hans Hansson | May 16, 2011

Under new zoning (called the "Eastern Neighborhoods Rezoning") effective January 19, 2009, the Board of Supervisors has created a number of new areas in the eastern side of the City which can now be used only for activities called "production, distribution, and repair" ("PDR"). Formerly, these districts (East SOMA, the Mission, Showplace Square/Potrero Hill, and the Central Waterfront districts (mostly "M" zoning districts), contained the most permissive zoning, allowing a mixture of PDR, housing, office, and retail.

Almost 1,000 lots zoned M-1, a zoning which allowed a wide assortment of uses including residential, office and retail, have been rezoned to industrial only (PDR).

The rezoning has lead to a process to legalize office, retail or residential space in areas that no longer allow such uses. The only use one cannot legalize is live work space without benefit of permits.

Many alteration permits showing "office" as a use may be challenged by those political groups who want the Eastern Neighborhoods to become mostly industrial. This is because most owners and tenants left the submittal of alteration permits to contractors, who may have filled in the "proposed use" box in an alteration permit in a wrong way. Also, in the dot-com boom, the immediate needs for office space were so intense that owners may have placed tenants in spaces without going through the lengthy San Francisco permit approval processes.

WHAT ARE DEEMED ILLEGAL USES THAT HAVE TO TERMINATE?

The rezoning has made existing office uses in PDR districts into either "legal" nonconforming ones or "illegal" non-conforming ones. Illegal ones are those without Building Department (and Planning Departments) permits which explicitly call out the use as office. Notices have gone out to 7,000 owners telling them this. If the uses are illegal, enforcement by the Planning Department will commence January 19, 2012. Those that are legal may continue indefinitely as long as (1) the alteration permits by which they moved in indicate on them that the proposed use is "office" (2) there is no physical expansion or intensity of use, (3) there is no period of office vacancy for three or more years, and (4) there is no change of office use to a PDR use at any future time. There is a retroactive legalization process discussed below.

WHAT IS THE GRACE PERIOD FOR COMING INTO COMPLIANCE BEFORE BEING SUBJECT TO TERMINATION?

If an occupant of a space has moved in without benefit of permits and has been in the space for more than two years as of January 19, 2009, the occupant or owner will have three years (starting January 19, 2009) to legalize by paying a fee of between $10.50 and $12.50 per square foot (and an additional $1 per square foot for child care where 50,000 sf or more is being legalized). Any City determination to allow legalization (or not) can be appealed to the Board of Appeals.

WHAT IF LEGALIZATION IS IMPOSSIBLE?

If for certain reasons a particular space cannot be legalized (for example, the user of the space has moved in within the past two years), new office tenants or the continuation of existing ones is still possible. If one has a combination of PDR space and office space, where the PDR space is at least 1/3 of the tenant space, one can have 2/3 office space. This is known as an Integrated PDR Space ("IPDR Space"). For very small spaces, even a lesser percentage of the square footage must be PDR. The City has decided to allow this for only a limited number of building types, and may extend it to other buildings once the City determines the success of this. The creation of IPDR space will trigger a fee much lower than the legitimization fee, but it may be forgiven under certain circumstances.

Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500.

Starboard TCN is posting this article on its websites and blog with the approval of Brett Gladstone Esq.

This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. http://www.gladstoneassociates.com



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