How the City Has Changed Since New Landlord-Tenant Buyout Provisions Went Into Effect
On our way back from an appointment at City Hall to confirm a new listing that we will tell you about in future posts (very exciting) we stopped by the Rent Board just because. Really, just because. Why? The folks there, no matter how busy, are among the most knowledge and friendly in the City and have copious amounts of data on rental units, evictions and, since last year, buyouts.
San Francisco changed its policy for landlord buyouts of tenants forcing the parties to register buyouts with tenants a little more than a year ago. Apart from having to register the buyout, landlords are now required to give tenants a written disclosure outlining the process and the tenant’s right to change their mind even after an agreement is struck.
The system was an attempt to regularize the system but leads to confounding results and perplexing questions especially if a landlord’s goal is to take the building condo. If the buyout involves more than 1 tenant than the chance to convert evaporates until 2024 or later. Moreover, if there is a single tenant occupying a unit if that tenant is protected that also renders the unit ineligible for conversion, even if the tenant is more than willing to take a buyout. We called his issue out when the policy first came out and wondered if that it would give rise to a spike in Ellis Act evictions, which mandate certain relocation costs and notice period. Why? Ellis Act fees are less than historic buyout agreement prices, which are not regulated. Ellis Act evictions also render units un-rentable for anywhere from 5 to 10 years depending the circumstances. But if the goal is to simply sell off those vacated units as individual TIC units to get out of the rental business then the Ellis Act route would be the cheaper means to get to that end.
Earlier this week, Zillow (NASDAQ: Z) noted that the Bay Area saw the biggest rent hikes in 2014 and sees this year being just as bad. Zillow’s website Friday made it clear that anyone opting to buy rather than rent in Hayes Valley’s zip code would have to pony up more than $900,000 and often well over $1 million.
The frustration can be seen throughout San Francisco, but let’s take a look at one of the city’s more popular neighborhoods, Hayes Valley. There, Avalon Hayes Valley apartments have come to the market at even higher rents than expected.
this represents a picture of what’s called “transit-oriented housing,” and a snapshot of overall median rental prices, via a survey of 17,000 one-bedroom apartment listings within a half-mile radius of a BART station. Now, in San Francisco, this is probably going to show some confusing overlap — Montgomery, Powell, and Civic Center Stations are all within a half-mile of SoMa, and Hayes Valley is probably reflected in Civic Center as well. And Curbed notes that the extremely low Glen Park figure is factoring in Excelsior rents (since you’re not going to find many one-bedrooms in Glen Park anyway). But here we see a more complicated picture that mostly supports the finding of last month that the median price of a one-bedroom in SF had now gone north of $3,200.
The ordinance “seeks to force the property owner to pay for a broad public problem not of the owner’s making,” said Breyer, who held a one-day trial in the case this month. “A property owner did not cause the high market rent to which a tenant who chooses to stay in San Francisco might be exposed, nor cause the lower rent-controlled rate the tenant previously enjoyed.”He said the city’s claim of a causal link between a landlord’s actions and the relocation fees was further weakened by the fact that the ordinance did not require tenants to spend the fees on replacement housing in San Francisco, or anywhere else.
Drafted “to ensure that real estate speculators in San Francisco do not buy rent-controlled property and empty it of long-term tenants,” Senate Bill 1439 would require a landlord to own a building for at least five years before invoking the Ellis Act to clear the building of tenants and would prohibit any attempt to circumvent the intent of the law.
With the Senate having initially rejected the legislation and time running out, Senator Leno promised to amend Senate Bill 1439 to include exclusions for “mom-and-pop” landlords and the bill was passed without a vote to spare.
The new language which has just been added to the bill:
“The five-year ownership requirement…shall not apply to an owner of accommodations who is a natural person, who owns no more than two properties, and who owns no more than a total of four residential units.”
If the amended bill is passed by the State Assembly, the bill would return to the Senate for another vote as well.
The time has finally come for Tower Two at One Rincon Hill to show itself off to the world. The leasing office is now open and we have all the details on every unit. Designed by Solomon Cordwell Buenz SCB architects, the 49-story tower has 298 units that are slated for LEED Silver. The units are between 613 to more than 3,200 square feet, with an average of 1,136 per square foot. That average makes it the largest average square footage for lease currently on the market. As expected, the units are luxury rentals that have fancy schmancy finishes and interior highlights like Studio Becker cabinetry and air conditioning. Select residences have walk-in closets, single or dual balconies and bonus rooms. One bedrooms start at $3,300 per month, two bedrooms start at $5,500 per month, and three bedrooms will start at $9,900 per month. Building amenities include a “Sky Lounge” on the 49th floor that’s 3,200 square feet and has a private dining room and a private catering kitchen. Renters will also have access to two fitness facilities and the outdoor heated lap pool.
The legislation by Supervisor David Campos would require property owners who evict renters under the state Ellis Act to pay the difference between the tenant’s current rent and what they would have to pay for a similar apartment for two years.
The board – which has seen a slew of housing-related legislation in recent weeks as city leaders cope with soaring housing prices and tenant displacement – also voted unanimously Tuesday to support a pilot program that would allow property owners in the Castro district to build in-law units. It came one week after supervisors approved groundbreaking legislation by Supervisor David Chiu to allow property owners to voluntarily legalize their in-law units. There are an estimated 30,000 to 50,000 such units in the city already.
Campos’ legislation was approved 9-2 and will face one more vote at the board before being sent to Mayor Ed Lee, who has not said whether he will sign it.
The much-talked about 754-unit luxury rental high-rise NEMA opened late last year to much fanfare, so it was no surprise when its South Towers were 100 percent leased just months after officially opening. The development is a mere half block from Twitter’s HQ, and its sales team is definitely catering to the young and affluent tech set—or at least people who have deep enough pockets to shell out $3,500 a month for a studio apartment. Now it’s time for the north towers’ close-up. One is a 37-story high-rise and the other’s a 14-story mid-rise; both were designed by Glenn Rescalvo at Handel Architects. Are you sitting down? Because we have pricing.
New SF & State Legislation Could mean No More Ellis Act, Legalized In-Law Units and $47,000 Mandated Tenant-Payouts
By the time May Day 2014 rolls around, the Board of Supervisors may enact legislation radically altering “in-law” units and tenant-displacement payouts under the Ellis Act that you may your in-laws wrote the bill. Lead by Board President David Chiu and in conjunction with Supervisor Scott Wiener in-law units would be legalized — or at least a clear pathway to legality would be created. Among other ideas circulating is an initiative seeks to raise the average $5700 per tenant to more than $47,000 per unit — eviscerating any current per-unit maximum. Apart from legalizing the thousands of in-law units (most times found behind the garage of Sunset/Marina-style homes or at the bottom of a two-unit Edwardian building —you know what they look like) larger implications of the current draft legislation may:
Require landlords to bring these areas up to code, with some allowances like ceiling height being waived but others like having a safe cooking area, heating, separate bathroom, egress means, window requirements, and systems improvements on the one hand but disallow landlords from passing any of that cost onto their tenants. (Note: because the improvements are health and safety-related this effectively makes them required).
Eliminate a homeowner’s option to ‘take-back’ illegal in-law units. Under current practice (although this may be changing currently anyway) a homeowner with the bona fide intent to remove the in-law unit from the rental market can do so by removing separate kitchenette, showers or any other indicia of a separate living area would no longer be an option the City will sanction. This is all the more the case when a tenant reports that the area is being used as an in-law unit thus mandating a use status change for the previously illegal use of the area; the current policy is akin to a “don’t ask, don’t tell” policies for building inspectors discovering existence of an illegal in-law unit.
Conversion into a legal in-law unit will place an entire building under rent control. While this is pretty much what happens with single-family homes that have a separate tenant renting the in-law portion of the property, the question is unclear if the in-law unit is vacant. Remember condos and single-family homes rented to a single tenant are exempted from the rent-control provisions of the Rent Ordinance currently, but if the in-law unit is legal but vacant, what impact does this have on the rest of the house?
And just who lives in there?
Certain neighborhood groups like those in St. Francis Wood and Balboa Terrace are reportedly opposed to this because legalizing in-law uses in their neighborhoods will impact property values negatively because what sets these areas apart from other parts of the City is the lower density that comes from having detached homes with just single families occupying.
And, the other initiatives taking place concern the Ellis Act. One measure goes so far as to prohibit their use completely, another imposes a 5-year ownership requirement before a landlord can use the Act’s eviction procedures and the other recalculates minimum payouts to tenants using a formula that took the difference in market rent and average rent and multiplying it by a number months arriving at an average figure of $47,000 per unit. To read the notes about the legislation, click here.
No Enlarged Ellis Payouts… for now.
In November 2014, U.S. District Court judge Charles Breyer (Justice Breyer’s brother) struck down Supervisor-passed escalated Ellis Act payments that would have had landlords utilizing the Act to vacate buildings en masse pay relocation fees of at least $40,000 to $100,000 to displaced tenants instead of the $15K-$20K mandated by current regulations. In part, Breyer wrote: “The ordinance requires an enormous payout untethered in both nature and amount to the social harm actually caused by the property owner’s action.” Click here for details.
Trick or Treat? Buyouts of More than 1 Person Can Disqualify Condo Conversion; Increase Ellis Act Evictions Even for 2-Unit Buildings Possible
Did you know that new laws regulating tenant-buyouts by landlords (whereby landlord pays tenants money to leave their rented unit without having to institute a no-fault eviction) are scheduled to come online in March 2015 that may increase Ellis Act Evictions. San Francisco’s Board of Supervisors passed legislation that is slated to come into effect in March 2015 but with consequences for any landlord buyout of more than one tenant taking place after October 31, 2014 that are far-reaching with some potentially causing the very thing the legislation was designed to mitigate, i.e., Ellis Act evictions.
Even 2-unit buildings that have tenants who want to take a buy-out may be impacted by this law. How? Until now, no regulations applied to tenant-buyouts. No records were kept and no bad eviction history that can jeopardize condo conversions was ever recorded. Lucrative condo conversion was only ever put at risk if the tenants disagreed to relocating and an owner had to resort to transitioning tenants out of a property under the Ellis Act or an Owner Move-In eviction. Because the penalty was so draconian, tenants had considerable leverage to exact a higher buyout amount, reportedly averaging $40,000-$75,000 per buyout. In contrast, an Ellis Act or OMI eviction only requires a maximum payout of $20,000-$25,000 per unit (not per person).
The new legislation turns this understanding on its head. Now, if there is more than one tenant being bought out of a unit (i.e., a couple or roommates) or if there is just one ‘protected’ tenant being bought out, the entire unit will be rendered ineligible for condo conversion for at least a decade. Every buyout must now be reported to the Rent Board and comport to legislated requirements regardless. Thus, instead of paying high voluntary buyout costs, if there is more than one tenant who needs to be bought out of a unit (or just one disabled/protected tenant) and take condo conversion off the table, there’s nothing preventing an owner from using the Ellis Act with more impunity. This will radically impact multi-unit building property values and makes it all the more necessary you have the likes of Kevin+Jonathan working for you to sort it all out.
From a disclosure prepared by the SF Realtors:
San Francisco has adopted a new ordinance regulating “Buyout Agreements” (agreements by which a landlord pays a tenant money or other consideration to vacate a rental unit) and “Buyout Negotiations” (any discussion or bargaining, oral or written, between a landlord and tenant regarding the possibility of entering into a Buyout Agreement) for residential rental properties which are subject to local rent control laws. The new law is operative March 7, 2015, but it has a retroactive effect which precludes condo conversions for properties where:
(a) Buyout Agreements were entered on or after October 31, 2014; and,
(b) involved 2 or more tenants (even in the same unit), or any tenant of a “protected class” as defined in the ordinance.
Note that local law presently:
(a) allows conversion of certain 2 residential unit properties where each unit is owner- occupied by a separate owner;
(b) otherwise disallowsconversion of 2–6 residential unit buildings unless approval was sought under the 2013 “Expedited Conversion” Program; and
(c) now prohibits conversion of 5+ residential unit properties.
Under the new law, prior to Buyout Negotiations with any tenant, a landlord must provide the tenant with a written disclosure including, among other things, references to their rights to refuse to negotiate or enter into a Buyout Agreement, consult with an attorney, and rescind (unilaterally terminate) any such signed agreement for a period of 45 days after the agreement was fully executed.
Further, this disclosure must include a statement that the tenant may obtain information from the San Francisco Rent Board about:
other Buyout Agreements in the tenant’s neighborhood
a list of tenants’ rights organizations
a statement explaining the legal implications of condominium conversion for landlords entering any such agreements, and,
for entity landlords, the names of all people within that entity conducting the negotiations, as well as the names of all people who will have decision-making authority over the terms of the Buyout Agreement.
Additionally, prior to Buyout Negotiations with any tenant, a landlord, among other things, must also
(a) provide notice to the Rent Board of the landlord’s name and contact information, the names of the tenants with whom the landlord intends to negotiate, the address(es) of the unit(s) involved,
(b) a statement under penalty of perjury that a proper disclosure (discussed above) has been provided to each tenant, and,
(c) only enter into written Buyout Agreements and include certain mandatory language in them.
A copy of any executed Buyout Agreement must be filed with the Rent Board within 14 days after the tenant’s rescission period has expired. The Rent Board will be creating a publically searchable database of such agreements, and required disclosure and notice forms to use to comply with this law. If, in considering the purchase of a property, a buyer contemplates any Buyout Negotiations, any such buyer is strongly advised to seek qualified legal counsel concerning such plans before entering into a purchase agreement or removing any relevant contingencies.