People wanting to buy their own place in San Diego for less than $300,000 have essentially one option: apartments that have been converted to condominiums. Owners of approximately 15,000 apartment units have converted them into for-sale condominiums or filed applications for conversions in recent years — making San Diego the hottest market in the state for condo conversions.

But things might be about to change. San Diego City Attorney Michael Aguirre advised city planners in November that condo conversions are subject to California Environmental Quality Act (CEQA) review. In December, affordable housing advocates sued the city for not applying CEQA to condo conversion applications. And a state legislator whose district has seen 80% of San Diego’s condo conversions is asking tough questions about the practice.

“The big concern is that people are being displaced,” said Tom Scott, executive director of the San Diego Housing Federation. “They can’t afford to buy their rental units, and they don’t have anywhere else to go. We aren’t building any more rental units.”

San Diego is not alone. As California’s housing prices have continued into the stratosphere, the importance of condominiums as entry-level, for-sale housing has increased. For a variety of reasons, though, the number of newly constructed condominiums has been relatively low in recent years — making condo conversions an attractive option.

The trend actually is a repeat of the past. Condo conversions first became commonplace during the 1980s. Local governments, worried about the loss of rental housing, responded by enacting ordinances limiting conversions. Now, some of those ordinances are getting a fresh look, and other cities are considering new legislation. But not all cities. Some see the transformation of apartments into for-sale units as a form of urban renewal and are encouraging the trend.

Over a 17-month period ending in June 2005, the City of San Diego received applications to convert 11,422 rental units, a stunning increase over applications for 2,275 conversions filed from 1999 to January 2004, according to the city attorney’s office. The recent applications amount to 5% of the city’s total rental stock. The city has been processing the conversions under a categorical CEQA exemption for existing facilities, but city planners requested an official opinion from Aguirre.

“The categorical exemption for existing facilities,” Aguirre responded, “is not applicable because the change in use from rental to condominium is qualitatively different to warrant environmental review. There are significant adverse impacts and cumulative impacts including displacement impacts to renters, loss of rental and low-income housing, and growth inducing impacts associated with condominium conversions.”

Furthermore, Aguirre wrote, the city should require condo conversions to comply with current building, fire and electrical standards.

California Environmental Quality Act expert Terry Rivasplata, of Jones & Stokes in Sacramento, said the only way to exempt condo conversions from CEQA is if a city determines that the conversion would result in no physical change to the environment. But, he added, the use does change and with that change may come impacts on things like parking and traffic. For example, a city may require one off-street parking space for an apartment, but two spaces for a condominium, he noted.

Those are the sorts of impacts that concern Assemblywoman Lori Saldaña (D-San Diego), who, with Aguirre, convened a public hearing in December that attracted 300 people and lasted three hours.

“I’ve seen these development trends come and go for decades,” Saldaña said. “Oftentimes, the ones that seem like a real good idea at the time are detrimental to the community over time.”

The same apartment that houses one or two people may become home to a young family with children when turned into a condominium, creating more traffic and increasing the need for public services, Saldaña said. “Entry level housing has a different impact than long-term rental housing,” said Saldaña, a renter herself.

At the public hearing, testimony was mixed. Renters told of the hardships they face when their apartments become condominiums. Developers and real estate agents spoke of the opportunities that conversions provide to first-time buyers.

Saldaña said she has no interest in carrying legislation on the issue, but said she will urge the new mayor, Jerry Sanders, and city planners to at least slow down the conversions. That appears likely to happen one way or another. Although the Development Services Department questioned Aguirre’s opinion, the groups Affordable Housing Coalition of San Diego and Citizens for Responsible Equitable Environmental Development sued the city in December, challenging the city’s approval of about 50 conversion projects without CEQA review. The groups also have appealed about 100 other conversion approvals. Undoubtedly, requiring CEQA review of condo conversion applications would slow the process.

Affordable housing advocates are concerned because, as the Housing Federation’s Scott explained, rents typically are 30% to 50% less than mortgage payments on the same unit. Thus, most renters are forced out, a particular hardship in San Diego, which has a rental vacancy rate of only 3%. An analysis released last fall by Burnham Real Estate confirmed affordable housing advocates’ fears. Burnham reported that only about 5% of residents in converted buildings end up buying a condo in the same complex.

“This means the 95% who have to find another place to live are either going to buy a condo in a different complex, or rent another apartment,” Burnham’s Mark Langston said. “Overall, the need for rental housing has not decreased and turnover can provide owners the opportunity to raise rents for new tenants moving in, especially in the lower and middle market sectors.”

San Diego does require the payment of three months rent by conversion applicants to low-income renters who are displaced when the vacancy rate is less than 7%. Like many others, the city also imposes its inclusionary housing requirements on conversions. In San Diego, this means at least 10% of converted units must be affordable to people making no more than 150% of median income.

In 2004, the California Association of Realtors sponsored a bill (AB 2175, Canciamilla) that would have limited local regulation of condo conversions. The majority of cities have such regulations, according to a bill analysis. An overwhelming number of affordable housing and social service organizations opposed the bill, and it died. Two years later, local regulations appear to be more vigorous than ever.

For example, the City of Napa recently revised an ordinance dating from 1987. The old ordinance allowed a limited number of conversions if vacancy rates were 3% to 5%, and unlimited conversions if the vacancy rate were more than 5%. The revised ordinance permits some conversions only if the vacancy rate is at least 5%, Senior Planner Jean Hasser explained. Under the regulation, property owners may convert half the number of multi-family units built the previous year, or the number of units equal to the difference between a 5% vacancy rate and the current vacancy rate. Vacancies now stand at 5.6%. The 0.6% difference equates to 48 units, she said. The city has received two applications for the conversion of a total of 80 units, so for the first time Napa will have competition for the use permits.

While Napa was amending its rules, the City of Dublin was adopting its first ordinance. That city now permits the conversion of no more than 7% of apartments in any one year, and the City Council made clear that figure could change over time.

Still, some cities would like to trade some apartments for condominiums. For example, the City of El Cajon since 2002 has waived off-street parking requirements for conversions, and the city no longer requires separate water meters for condominiums. The majority of housing units in El Cajon are apartments, and city officials see the conversions as a way to increase home ownership, leading to long-term neighborhood improvement.

Contacts:
Jean Hasser, City of Napa, (707) 257-9530.
Tom Scott, San Diego Housing Federation, (619) 239-6693.
Assemblywoman Lori Saldaña, (619) 645-3090.
Terry Rivasplata, Jones & Stokes, (916) 737-3000.
San Diego City Attorney’s opinion: http://genesis.sannet.gov/infospc/templates/attorney/law_mol.jsp