Dancing Around A Two-Step Flip

Condo Conversion Given the Boot

by Nick Welsh

Bill Mahan may speak softly, but he wields a big red pencil. Just ask developer Bob Hart, who until last Thursday had dreams of converting the four two-bedroom rentals on top of an office building he owns in the 3400 block of State Street into condominiums. That’s when Mahan — an eight-year veteran of the Santa Barbara City Planning Commission and an architect by profession — went to work. Pulling out his fabled red pencil, Mahan did some quick and dirty calculations that turned Hart’s dreams, then before the commission on appeal, into a nightmare. The results of Mahan’s math have been plenty embarrassing to city planners as well. Had they done the same calculations as Mahan, perhaps they might have caught a small but lethal glitch in Hart’s plans much sooner.

Mahan discovered that Hart’s proposed condos did not qualify for the crucial break in parking requirements that city planners had said they had. And while the numbers are not large — eight required spaces rather than the four proposed — their financial implications for Hart are huge. His project —  a modest mixed-use combination of office space and apartments — is already built and there’s no room to spare on the ground for four additional parking spaces. As Mahan said afterward, his discovery proved “a bullet between the eyes” for Hart’s specific proposal. But for real estate investors eager to capitalize on Santa Barbara’s stratospheric housing prices by converting otherwise modest rental properties into more lucrative condominiums through a maneuver known around City Hall as “the two-step flip,” it was, as Mahan said, “a shot into the hull.”

The two-step flip is a dodge used by developers to avoid some of the risks of regulatory oversight and discretionary review involved with condominium conversion; it’s also a method savvy property owners use to escape the exorbitant insurance costs associated with condominium development until recently. Here’s the way it works: property owners apply for permits to build apartments first, and then they turn around and seek permission to convert the apartments to condominiums. Thus far, city planners have been able to document 13 instances of the two-step flip — involving a total of 43 units — since 2002. In some cases, the flip occurs two years after construction. But in Hart’s case, the initial request for condo conversion arrived at City Hall just three weeks after Hart had obtained his building permits. As Mahan stressed, this practice is perfectly legal. Nonetheless, it doesn’t sit well with a Planning Commission increasingly exasperated over its limited ability to stem the loss of rental housing.

Just two days before the Planning Commission’s deliberations last week, members of the Santa Barbara City Council had expressed grave concern about gentrification and the loss of modestly priced rental housing. The two-step flip was specifically lambasted by name, and housing advocates urged that the practice be severely limited or stopped altogether. The most obvious solution is to impose a time restriction on the flip. And until 1992, City Hall did just that, requiring a five-year waiting period before allowing a new apartment to be eligible for condo conversion.

Adding fuel to the Planning Commission’s fire, earlier this year the City Council put a controversial mixed-use housing project slated for upper State Street on indefinite ice at the insistence of angry neighbors concerned that their piece of paradise had become a traffic hellhole. Until the council adopts a master plan for upper State Street acceptable to the community, any project that fails to provide the full number of parking spaces is likely to get a very cool reception. Given this sudden sea change now being proposed within city hall, Bob Hart was as much a victim of bad timing as he was of Mahan’s red pencil.

But the pencil definitely hurt. For Hart’s mixed-use project to qualify for the break on parking requirements, the square footage dedicated to residential use could not exceed that of his commercial space, according to city land use rules. Back in 2002, when Hart’s project first went before the city’s Architectural Board of Review, that was the case. It was also the case when Hart was granted his building permit in September 2004. But when Hart’s project went before the Planning Commission last week, the numbers weren’t so clear. No one had added up the square footage of the four condos and compared that sum with the square footage of the downstairs commercial space. “It just looked close to me,” Mahan said. When he added them up, he discovered that the condos took up 43 square feet more than the commercial space. While that was admittedly tiny, it was sufficient for Mahan and the rest of the Planning Commission to deny the condo conversion and uphold the appeal filed by neighborhood activist and City Hall watchdog Jim Kahan of the Allied Neighborhood Committee. “This was a dead duck,” Mahan said.

At Thursday’s meeting, Kahan — given to blustery and detailed diatribes that try the patience of many city planners — ascribed less than pure motives to the planners who reviewed Hart’s proposal and endorsed it. He complained that city staff missed many irregularities and transgressions by Hart — involving acoustic studies, storage shortages, setback violations, and landscaping omissions — and concluded, “It doesn’t smell good.” Mahan acknowledged that errors were made but isn’t comfortable with Kahan’s approach. “I’m not into this conspiracy thing,” he said. “Accidents happen. We have thousands of projects and our staff is overworked.”

City planner Betty Weiss is still trying to figure out where the numbers changed and how Hart found himself on the wrong side of the parking requirement equation. Because many of the planning documents have been destroyed since Hart first got his building permit, it may be difficult recreating the necessary paper trail. Hart was out of town for his mother’s birthday party and was represented by land use agent and former city planner Dave Tabor. Tabor complained he was given only 15 minutes to make his case, and that he’d been “ambushed” by Kahan, who delivered an expanded critique just two days prior to the meeting. Tabor said he and Hart plan to appeal the Planning Commission’s decision to the City Council. As to Mahan’s calculations, he said, “The numbers on the plan are the same numbers we worked out with city staff. They haven’t changed. The only thing that might have changed is how they’re interpreted.” Tabor dismissed many of the complaints leveled by Kahan as “red herrings,” saying his client had been victimized by the political equivalent of a perfect storm. “They’re trying to balance the broken housing market on the back of this one project,” Tabor said.

In the meantime, Mahan has just one month left on the Planning Commission. Most likely, he’ll be replaced by the time Hart’s appeal goes before the City Council, or the Planning Commission takes up the inevitable debate over the two-step flip. While expressing sympathy for Hart’s predicament, he also expressed satisfaction at making the equivalent of a shoestring tackle involving a project he said is so fraught with problems it should have been demolished from the get-go. When asked what prompted him to put pencil to paper last week, Mahan laughed, and said, “You’ve heard of the luck of the Irish? Well, I’m Irish. I guess I was just lucky.”

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