The Future of Residential Rent and Eviction Control in San Francisco and How to Survive and Prosper in the Meantime
With the permission of Mr. MacDonald, we are posting his recent summary of the history of rent control that he provided to the San Francisco Real Estate Roundtable. His twelve opinion points below should not be misconstrued as legal advice. Mr. MacDonald is a Professional Attorney at Steven Adair MacDonald Partners, P.C. and is a referred professional to clients of the Red Bridge Group in Noe Valley.
Introduction: I will very briefly describe for you what our local system of residential rent and eviction control is really like 36 years after its creation. I represent both sides. I am not an ideologue. I have met the nicest landlords and the most vulnerable tenants in my time. I have also encountered some extremely unsavory building owners and completely criminal tenants, as well. As a lawyer I am duty bound to take my clients as I find them and to be the most effective advocate I can. At the conclusion I will argue that our present system ultimately helps no one. The forces of supply and demand will always control the cost of living in our fair city.
History: Rent control got its start in the early 20th century in New York City. It was also adopted in many places during World War II as part of necessary price controls. The more modern history is a product of liberal politics in the early 1970s in the Boston area, jumping to the West Coast by the end of that decade. In Berkeley, Santa Monica and San Francisco a more strict form of control was passed into law. Actually, rent and eviction control go hand in hand. One without the other is ineffective. This is particularly so since our state legislature in the mid-1990s decided that after a tenant vacates a landlord may raise the rent to market rate. It then becomes controlled again.
“Just Cause”: Rent control only allows tiny rent increases each year. But the other component, eviction control, allows the tenant to remain indefinitely, unless the owner has “just cause” to terminate the tenancy. There are sixteen. The first seven are “fault” based, i.e., nonpayment of rent, nuisance, etc. The latter nine are “no fault”, e.g., owner-move-in or Ellis Act. These all come with a host of technical requirements and the latter group requires relocation payments. They also mandate “good faith, lack of ulterior motive”, subjective issues which an expensive jury trial might have to decide.
Legal Challenges: Time and again landlords have challenged these local ordinances, all the way to the California and U.S. Supreme Courts. No full frontal assault has ever succeeded.
Vacancy De-Control: I alluded to vacancy de-control. That means that when a tenant finally vacates, voluntarily or involuntarily, the rent can be raised to market. If the tenant enjoyed protection for a couple of decades or more, the rent could triple or quadruple. If it goes up $2,000.00 per month the value of the building can go up $200,000.00 as the rent roll typically determines the value of an investment property. As you can imagine, in the involuntary displacements there are many battles and considerable legal fees.
Current Results: 36 Years After Passage The result of all this, no doubt never considered in 1979 when our Board of Supervisors and Mayor Dianne Feinstein signed this into law, is tremendous tension. The tenant is desperate to maintain possession, the landlord highly motivated to recover it. Frankly, I submit, and even the executive director of the Rent Board has agreed with me, that it is beginning to look like any tenant now living in a smaller building WILL be evicted, sooner or later, one way or the other. There is a target on their back. Even elderly, low-income, disabled tenants.
What Is The Ellis Act?: The Ellis Act is state law and so it trumps local ordinances. It allows a landlord to clear out a building: everyone and anyone. Some relocation money is required. But then the owner cannot re-rent for five years. What are his options? 1. Live in it, or hold it empty, if he can afford to, and re-rent it five years later for top dollar, or 2. Sell off the apartments as tenancies-in-common, TICs. Not the same as a condo, but almost. Individual financing now available. Very tempting, either way. Owners have profited handsomely. Either the rents increased ten-fold; or the value per unit went from $200,000 to $1,000,000 when sold individually.
Who Benefits?: I am not an economist. But I think that I understand the basics. We have a limited supply of housing on the tip of this peninsula. We have a very steady and strong demand. Rent control results in two distinct tiers of housing prices. I remember when my son, as a young lawyer, moved into the Golden Gateway Center, a massive apartment complex by the Embarcadero. He told me, as I helped move him in, that I would notice two distinct types of occupants. Older folks, paying $700.00 per month for their unit, and younger professional types paying several thousand for identical apartments! I believe that without rent control artificially deflating one section of the market, a free market would result in the higher rents coming down to the equilibrium. Even now, in the long run, with the death or departure of the tenant, the landlord ultimately gets back to the high market rent, much higher than the equilibrium rent. So, nobody ultimately benefits. It averages out. In fact, the tenants who have enjoyed reduced rent for many years suffer the most when they get evicted through owner-move-in, the Ellis Act, or even a buyout. They are completely unprepared for the inflated market rent. They benefited for a while, a long while, and then face a severe shock. Frankly, the Ellis Act (despised by some) opens up many opportunities for middle class folks to buy their home. A T.I.C. apartment is less costly than a condo. When the “evil” landlord Ellises a ten-unit building, making a very tidy profit, he also allows ten people, or couples, or families to own their home in San Francisco. If it got done, or if condo conversion was allowed, on a larger scale prices would come down, given the larger supply.
How Landlords May Prosper: 1.Know the law, at least the basics. 2.Belong to SFAA or SPOSF, the landlord guilds, sources of education. 3. Think before you speak or consult a knowledgeable attorney whenever even a minor dispute erupts. 4.Have great insurance. Landlords and their insurance companies probably pay out $50 million in wrongful eviction claims and related matters here in San Francisco every year. 5. Know when you are legitimately entitled to a market rent increase, i.e., when the last original roommate has departed. Understand when you have “just cause” for eviction, either fault-based or no-fault. 6. And yes, if you have a building where rents are a fraction of market consider cashing in by selling an empty building as T.I.C. homes for first-time homeowners. If you don’t the next owner of the building will probably figure out that is how to maximize the value.
How Tenants May Survive: Tenants can best survive in the current system by renting in a building constructed before 1979, and thus rent controlled. They should live in a complex as large as possible so that it is unlikely that they will ever face an owner-move-in eviction. Similarly, up to this point, owners are reluctant to Ellis Act, i.e., empty out, a very large building due to their limited options afterwards. However, that may change, and it already is. Witness the Park Lane building, some thirty-three rent-controlled Nob Hill luxury apartments that were all emptied out last year and sold as high-end T.I.C.s. And, of course, tenants must behave themselves, not giving an opportunistic landlord any ideas about a fault-based eviction.
The Future- Peaceful Disassembly: When the total dysfunction of this present regulatory regime becomes painfully apparent to a growing proportion of the electorate I suspect that some of our very capable local elected officials, Scott Weiner and David Chiu come to mind, will take the necessary leadership on the issue in future years or decades. Probably, at that point, they could support amending the ordinance to deregulate units, permanently, when they become vacant. Protections will remain for those tenants already in place. Our society can always, as it has, call for a public funding of housing for those in need, elderly, disabled, low income. The result will be a gradual return to a free market, and an equilibrium resulting in deflating rents for some units, and higher rents for the newly decontrolled units. It may also save the public fifty million dollars per year in legal fees, and the insurance companies and those paying policy premiums another fifty million dollars annually. (I base these figures on amounts I witness cycling through my firm and what I perceive my market share to be.) There won’t be any more buildings being kept vacant for five years, either.
Political Will & Leadership: Currently, more so than ever, elected officials particularly when seeking re-election or higher office, are falling over each other to be seen as more pro-tenant than their competitor. Recall the last election when the “two Davids”, Campos and Chiu, both members of the Board of Supervisors, both Harvard Law school grads and liberal Democrats, sharing a 98% identical voting record, had to tar each other claiming one was more concerned with tenant rights than the other. David Chiu made the mistake of allowing me to host a fundraiser for him only to be met by loud protesters outside John’s Grill since I represent landlords (even though I represent tenants, too.)
Conclusion: I am not comparing rent control to the Soviet Union. Not at all. In fact, my personal politics may be the most liberal in this room. I am just saying that it took a man like Gorbachev, a man of the century, really, to have the intellectual integrity and leadership needed to admit when something is not working. Even something sacred. We will need that, too, some day. -S.A. MacDonald