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April 26-May 2, 2006

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Marty Miller

Photograph by Felipe Buitrago
Conversion Rate: Cupertino's Planning Commission chairman Marty Miller says the city is struggling with the lowest property tax revenues in the area.

Welcome to Condotino

Locals are finding plenty of pitfalls in condo conversion. So why is it the hottest housing trend in Silicon Valley?

By Sercan Ersoy

THE LANDSCAPE of the Santa Clara Valley has kept an eerie sort of consistency for well over 100 years. New homes were built on top of the orchards along the same basic grid so that, from the air, the houses look like little more than our most recent big crop. And now this crop has changed again, with condos beginning to overtake the suburbs and urban peripheries.

There's a legitimate problem facing those who want to live here: Suburban housing prices and job creation rates are still rising more than a half decade after the dotcom bust, while average incomes are considerably lower than at any time in the late 1990s. What that means is more and more people moving to an area where fewer and fewer can actually afford to live.

In a way, condos seem like the perfect solution to this dilemma. Not only are they considerably cheaper than standard suburban homes, but they allow cities and towns to accommodate new residents and new home buyers in an environment where undeveloped land is almost nonexistent.

And yet, something is amiss. In Cupertino, condo development is squeezing small businesses. In Mountain View, it's making life tough for low-income renters. None of those being crowded out find condo development to be the affordable-housing panacea civic leaders make it out to be. And in towns like Mountain View, where the rental market is far from on fire, there are already units available to house new residents and young professionals, without displacing low income renters.

So the question becomes: what's really behind the hottest housing trend in Silicon Valley?

The Curse of Prop. 13

The answer seems to lie in Proposition 13, the 1978 law that limited property taxes to "one percent of the full cash value of such property," with the "full cash value" generally assessed when a property is built or sold. What's more, the law also prohibits an increase in property taxes of more than 2 percent a year. This means that, regardless of the skyrocketing property values in the Silicon Valley over the last 20 years, cities and towns can't take a cut without constant changes in ownership.

According to Cupertino's Planning Commission chairman Marty Miller, Cupertino already has the lowest property tax revenues in the area, and since the dotcom bust the entire South Bay has struggled to make up for a lack of other tax revenue it enjoyed only a few years earlier.

An analysis in the 2005 Silicon Valley Index, produced by a group of local business and government officials called Joint Venture, notes that total tax revenues for local cities dropped 20 percent after the dotcom economy collapsed, and that property taxes—which had stayed more or less consistent throughout the late 1990s—were suddenly far more important.

And what simpler way for cities to get back on their feet in the new economy than to not only approve development plans to remodel or build new structures that can be taxed at the current market rate when sold, but to do it for condo structures that can be sold a dozen times over at more than a half-million dollars a piece?

Goodbye Renters

Depending on the infrastructure on hand, Silicon Valley's suburbs treat condo construction in two very different ways. The first is condo conversion, in which developers buy up decades-old apartment complexes, modify them and then sell each unit off to individual buyers. This happens mostly in towns like Mountain View that have large numbers of apartment buildings and a less than booming rental market.

The process does make some sense. Converted condos, after all, provide more affordable home ownership opportunities for both young professionals and immigrant families working in Silicon Valley technology; selling for around $600,000 in a market where suburban homes cost well over $1 million. But, at the same time, the more rental units a city allows to be sold off, the fewer places nonprofessionals have to live.

"The apartments that people are thinking about converting to condos are the cheapest rent in the city," says Mountain View Planning Commission member Jack Siegel, "so you're driving people out of the only places they can afford." While Siegel isn't against condo conversion, he is concerned that as the process goes on, lower income residents will be driven out of the city almost entirely as low rents are replaced with significantly higher purchase prices.

"I think it's our responsibility as a city to take care of these people with lower income subsidies," says Siegel, adding the possibility that Mountain View could buy buildings itself and designate them as low income housing. Currently, however, there are no plans to do so.

The other type of condo development is based on the rezoning and demolition of structures on already developed land, replacing them with mixed use developments of condos and store fronts. Cupertino is probably the best example of this since they have fewer apartment complexes than surrounding suburbs, but an equally high number of professionals and new residents looking for homes.

Cupertino's plan for new housing, according to Planning Commission chairman Miller, involves ending the old zoning requirements that specifically limited businesses to certain parts of the city and homes to others. "The way building has been done since World War II is land has been zoned for different uses," Miller said. "Now people are saying 'we really did have a better way.'"

Miller wants to model the city's new look after San Francisco, creating a more urban suburb. "The only way we can provide affordable housing is to increase the density," he said. "And with increasing the density we also want to put services close by ... we should be designing hamlets."

But just as Mountain View's development plans may impact the city's low income renters, Cupertino's could conceivably cause similar problems for small businesses, with storefront rents in new, mixed use developments generally set at levels only national chains can afford. It's an especially crucial point since all the land currently under development had originally been zoned for commercial use.

Condo development has already displaced several acres of small, inexpensive office buildings in the heart of the city. Demolishing offices may have been a quick and noncontroversial way to kick off the condo boom, but now comes the tricky stuff. The De Anza 85 Shopping Center is one of the area's first strip malls to fall victim to the clamor for new housing. Although both San Jose and the developer, Braddock & Logan, favor using the site for townhouses, they had toyed with the idea of following the Cupertino model and building a mixed use condo community instead.

"I can't do rent double," said Masa Fujioka, owner of Kikusushi, one of the businesses being pushed out the mall. "We couldn't double the prices."

While Fujioka plans to move his restaurant elsewhere in Cupertino, he may not be able to escape the newest trend of construction and inaccessibly high rents.

Not Built to Last

There is another issue with condo-conversions: the quality of the complexes themselves. Alicia Parker, an urban development graduate student at San Jose State University, has been following that issue locally, and notes in her master's thesis that, "Typically, rental apartments have not been built to the same standards as ownership units. Rentals are designed for a shorter life and as the typical rental building ages, its loss of usefulness and desirability may decrease."

The truth of that analysis can be seen in Mountain View's own building code, section 25.50, which states that "multi-family housing is likely to deteriorate more rapidly than other forms of housing." According to Mountain View's chief building official, Ron Geary, this has historically been a serious problem, with developers making only superficial upgrades to an apartment complex before selling the units.

"Originally a lot of these developers would just put in a lot of cosmetic stuff," he said, "put in carpets, put in faucets, put on paint, and then sell it." Geary admitted that this regulatory loop hole left the public open to potential problems with their investment, but said the city had recently changed the rules for conversions to require developers to make more substantial upgrades.

And as long as these new regulations hold, condos may be a reasonable investment for those who can afford them. Whatever the impact on local communities, the conversion trend is certainly not going away anytime soon."If someone owns an apartment building and wants to convert it through the proper channels, they should be able to," says Siegel. "If it's properly done then I'm in favor of it."

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