Sunday, November 16, 2014

How not to start a co-op: Gentrification at 1040 Folsom Street

One of the unfortunate side effects of the rising popularity of communal living among middle and upper income people is that certain types of housing, once thought to be gentrification-proof, are now on the front lines.

1040 Folsom Street in San Francisco is one such example.  Former a SRO (single room occupancy) residential hotel, the three story, 10,000 square foot building was gutted by a fire in 2011, displacing 90 residents.  The building, built in 1912, is subject to rent control regulations, which specifies that  displaced residents have the right to re-rent their rooms at the original price after repairs are made. 

The building owner instead master-leased the property to The Negev, a property management startup that converted the building into a high-end co-op targeted towards tech workers.  Rent was doubled from $634 to $1250 for a room.  The Negev also reduced the number of rooms to 40, using the additional space for bars, game rooms, theaters, and other recreational facilities. 

While The Negev attempted to buy out the former residents, not all of them took the $500 buyout offer.  The Negev proceeded to rent out the entire building anyway.  About a month after the new residents had moved in, some of the old residents noticed, and filed complaints and lawsuits

You can look up complaints via San Francisco's Property Information Map - just enter 1040 Folsom Street.

At this point, the situation looks bad all around - not only is the building essentially double-booked, but as the number of bedrooms has decreased, even if it were vacated, it would be impossible to rehouse all the old residents. 

Broader Implications
While The Negev and other similar tech co-ops have proven that there is a market for this kind of housing, the displacement of low-income residents is a bad way to do it, and likely to lead to a backlash.  Currently, SF has regulations that limit conversion of residential buildings to other uses, I can foresee regulations prohibiting the conversion of bedrooms into non-bedroom space.

McMansions - a potential alternative?
The size of 1040 Folsom is similar to about 2 or 3 McMansions.  These types of buildings are quite common throughout suburbia, and a precedent has been established via Cupertino's Rainbow Mansion, a 5,000 square foot house in Silicon Valley. 

The conversion of large houses to communal living is already common in immigrant-heavy neighborhoods of the South Bay (just look for streets where the number of parked cars approximate 5-10 per house).  However, as zoning currently makes this illegal, and immigrants lack political capital, this model has been kept under the radar.  Tech companies, on the other hand, may be more willing and able to take the risks required to disrupt suburbia in a more visible way.