No penalty involved. The way a condo conversion works is that you need to subdivide the one parcel into many pacels. It’s called an airspace subdivision. Basically, you’re applying for a tentative tract map with the City to create individual parcels for each unit in the complex. That creates the separate ownership.

In most cities you have two years to act upon a tract map before it expires. And even then, you can apply for extensions of several years. So it is possible to convert to condos and continue to use as rentals, you’ll just have to go through the hassle and fees of an extension down the line. And it’s not out of the question to be denied of an extension. You’d have to have a good reason why you didn’t follow through with the tract map.

And yes, presumeably this would make the complex more attractive for sale. Basically, the complex would already be entitled for separte ownership if the new owner chose to do so.