JMBM Development Rights: TLC v. a Dose of Reality: San Francisco’s Moratorium on Condo Hotel Conversions

In August 2005, San Francisco raced into action at a speed uncommon for most governmental bodies and adopted an ordinance that prohibits the conversion of hotel guest rooms to condominiums in any hotel of 100 or more guest rooms. This moratorium has been put into place for 18 months while the City studies the potential economic impacts of the conversion of hotel guest rooms on the economy of San Francisco.

Why a moratorium?

It became known early in the summer that the Fairmont Hotel was exploring a plan to convert 226 of its 591 rooms into 60 housing units. Although a number of high profile hotels in San Francisco have included a condominium component for many years, the notion that the City’s Nob Hill landmark was considering reconfiguring its hotel rooms set off alarms throughout the City. San Francisco Supervisor Aaron Peskin compared it to “turning the Eiffel Tower into an office building.” Ironically, the portion that was being considered for conversion was not the historic older portion of the Fairmont but the newer wing that was added in 1961. It may seem that an 18-month moratorium to prevent transient hotels from converting to condominiums is an overreaction. However, there is considerable history within San Francisco that will clarify the actions of the City. San Francisco is a strong union town. There is a continuing bitter labor battle between the hotel workers unions and 14 hotels in the City, which began in late 2004. To say that this moratorium arose out of this labor dispute is probably too simplistic a view.

Additionally, San Francisco’s economy is based to a large extent on its tourism industry and the potential impact on
the fiscal health of San Francisco is substantial. In 2004, San Francisco saw $4.07 billion pumped into its economy from its hotel industry and one out of every seven jobs in the City is in leisure and hospitality services. The City is right to be concerned about any movement in the hotel industry that might threaten the City’s well-being.

What are the issues?

Without completely understanding what condo hotels would mean to the City, it chose to impose a moratorium. It is now the obligation of the hotel operators and developers who are pursuing these conversions to clarify the picture of how these operate, generate property tax revenue, impact jobs and so forth. Should these rooms provide more parking? Should they be required to meet the open space requirements of a condo/apartment building? Will other programs be affected? For example, the City and County of San Francisco has a requirement for all new, rehabilitated or converted residential developments in excess of 10 units to create jobs for San Franciscans.

Most successful condo hotels have 80-90 percent of their condo owners participating in a rental program in which
their units are used as hotel room inventory. This would still require the full range of services provided by hotel workers, and would continue to generate occupancy taxes for the City.

What should developers do?

When the moratorium expires, whatever regulatory scheme that is being proposed will need to a) be responsive to the concerns of various community interests; b) preserve the opportunity for new real estate investment activity; and c) be economically viable for developers, hotel operators, hotel workers, and the city’s coffers. Developers who are pursuing hotel-condo conversion opportunities will need to take the lead in this process by providing each community with accurate information and work with all stakeholders so that a reasonable compromise proposal can be reached.

For more information, contact David Cincotta at 415.984.9687 or DCincotta@jmbm.com.