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Bridging the Gap: Landlords and Tenants Can Win Together in San Francisco!

Bridging the Gap: Landlords and Tenants Can Win Together in San Francisco!

Bridging the Gap: Landlords and Tenants Can Win Together in San Francisco!

Writings about residential real estate, San Francisco, and all things home, by Shelly Sutherland, Kindred SF Homes Associate

In San Francisco, the relationship between landlords and tenants has often been characterized as adversarial, fueled by factors such as rent control, activism from both tenant and landlord groups, and negative media coverage. This narrative has painted landlords as profit-driven entities, while tenants are portrayed as vulnerable victims. 

Compounding this situation are stringent rental restrictions, causing landlords to tread cautiously in their communications with tenants because they fear legal repercussions and escalating tensions. 

At the same time, media outlets consistently highlight the seemingly insurmountable challenges of homeownership due to exorbitant property prices. 

However, hidden within our market are affordable opportunities that many first-time homebuyers dont know about. One such secret gem is found in multi-unit buildings, representing the most cost-effective asset class when evaluated on a per square foot basis. 

If you've hesitated to sell due to recent low market prices or if you’ve faced difficulties in selling your property, consider directing your attention to these unconventional yet promising buyers: your tenants. The economics for a landlord to sell their building to their own tenants, rather than to an investor, actually makes great financial sense. 

Let’s take a 5-unit building in Cole Valley as an example. (My business partner and I represented the tenants and one investor in the sale). The rents are below market at $12,000 per month since three of the units are rented to long-term tenants. With gross rent multiples (“GRM”) averaging less than 13 in San Francisco since November of 2023, that would mean this building would sell at no more than $1,872,000 (12 x 13 X $12,000). Instead, we sold the building in November of 2023 for just over $2,000,000. 

If you were to ask the buyers whether they overpaid for the building, they would categorically say “No!” It actually sold at a discount in the eyes of the four buyers of the property — three of the existing tenants and one investor. Why? Because the four buyers bought the apartments individually rather than as a building, in what’s called a Tenants-in-Common (“TIC”) purchase. 

As such, the metric for market value for a TIC unit is actually expressed on a price-per-square-foot basis, rather than as a multiple of a unit’s rent. TICs typically go for between $600 and $800 a square foot for this type of property right now in San Francisco. The tenants and the investor bought their units for $538 a square foot, a decent savings!  

Good for the tenants-now-owners. And good for the savvy building owner-now-seller, who now understands that your best buyers are actually your current tenants. 

For the savvy tenant, fear not. This is not a ploy to get your landlord to inflate the price of your building and convince you to buy your apartment at sky-high prices. This example property sale just demonstrates the importance of understanding the price and valuation differences between real estate asset classes. 

In a traditional San Francisco apartment building sale, a landlord sells their multi-family property to real estate investors who prioritize rents and net operating income. In the “new” TIC sales transaction, that same landlord dis-aggregates their building into a collection of individual apartments that are sold to their own tenants, for whom price per square foot and appraised value are more the prized metrics. 

In the TIC sales transaction, both parties can actually “win”. The landlord “wins” because they sell their building at a rate that may be slightly higher than what the current - depressed - multi-family property market would warrant. The tenants “win” because they are able to buy their unit at a price-per-square-foot that is below what the current market for TICs would warrant.

There are extra moving parts on the above example transaction. First, a Tenants-in-Common Agreement needs to be created for the tenants to protect their ownership interests. Second, rather than one loan on the building, each tenant obtains a fractional loan for the unit they are purchasing. 

We facilitated this mutually beneficial sale! We are The Neighborhood TIC Group, led by seasoned San Francisco Realtors Shelly Sutherland and Lisa Zahner. Their understanding of the intricacies of landlord-tenant dynamics and Tenancy in Common (TIC) requirements ensured a mutually beneficial outcome for all parties involved. 

The Neighborhood TIC Group’s  oversight includes recommending which attorneys and lenders to join the purchase to assure the completion of the transaction. Having Realtors who specialize in this innovative selling model can alleviate concerns and encourage landlords to consider engaging with their tenants for a property transfer. Ultimately, adopting this approach proves to be a win-win situation for everyone involved in reshaping the conventional landlord-tenant relationship into a collaborative and mutually beneficial sales transaction.

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