September 11, 2008
Ellis Acting To Renovate And Reset Rent Control, Not Exit The Business
From the Examiner with respect to Ellis Acting a rental building not to exit the business, but rather to renovate and re-enter at above the previous rent-control rents:
Bay Area native Greg Wimmer owns 11 units spread across three buildings in upscale neighborhoods. But currently, just four of them are used to house renters.
That’s because Wimmer decided to take a handsome but neglected seven-unit, 95-year-old building in Nob Hill off the rental market — by evicting the tenants — after he bought it in 2002.
He’s sprucing the building up now, and by taking his time, can bump up all the units’ previously rent-controlled rates up to market rate if he waits five years.
And some perspective by the numbers: 215,000 rental units citywide; 179,000 rent-controlled (and privately owned); 454 units Ellis Acted in in fiscal year 2006-07.
∙ Vacant by choice [Examiner]
First Published: September 11, 2008 6:45 AM
Comments from "Plugged In" Readers
If in-place rents are low enough, the opportunity cost of 5 years of lost income could be modest in comparison with decades (potentially) before the existing tenants move on.
Posted by: SausalitoRes at September 11, 2008 7:25 AM
Loophole, yeah right. Loophole.
Posted by: dede at September 11, 2008 8:08 AM
Sad that business folks have to take the "loophole" route in a supply / demand capitalist system (that means in the U.S.). I won't say laissez-faire in SF -- that could get ugly.
Posted by: livinintheloin at September 11, 2008 8:22 AM
You have to admire this guys guts! To have his picture splashed across a newspaper.
Does show in a small way that laws of economics have not completely suspended in San Francisco. The market is struggling to fix mispricing! Very inefficiently and at what horrendous cost! Both to society and to the enterpreneur.
I hope the thread stays focussed on the economics of the choice. Maybe missionite can be drafted to build a spreadsheet!
Personaly I think the wave of the future (next 5-10 years) is TICs - with or without Ellis. I recently posted some data in another thread on a 8 unit building in Mission/Dolores that sold in 6/2007 for $238 per sq ft. Now I see 5 TIC units for sale in this building at average price of $605 per sq ft. Seems to me there is room for healthy margins!
Posted by: chuckie at September 11, 2008 8:27 AM
Incredible. Leaving a place empty for 5 years could be cheaper than going on renting. That's what happens when activists go way overboard. They end up splitting people between owners and renters with no middle ground. There's seldom win-win in this environment. It's either the renter who wins (low rent) or the landlord who does (high rent).
Why in the world would the same place rent for everything from 500/month to 2500/month just because of the lease date. Level the playing field and the rent will settle at 1500. Rents will become affordable again to new teachers, firemen and nurses who are coming to town. OKay, we will lose a few characters who've been living nearly rent free for 30 years. But that's what social housing is for, isn't it?
Just my morning rant.
Posted by: San FronziScheme at September 11, 2008 8:32 AM
The US is a supply/demand capitalist system? Did someone miss the Fannie/Freddie news from the weekend?
Posted by: anon at September 11, 2008 8:35 AM
I think you're unrealistic if you think that elimination of rent control would make market-rates cheaper. San Francisco is undersupplied and will always be that way.
In the example you mentioned, I think the landlord would find plenty of tenants to pay the full $2,500.
Yeah, it may be an unfair subsidy to the tenant. However, rent control was passed a long time ago. At the time, it was a confiscation of property rights from owners. You can't fix that wrong by providing a windfall to current owners.
I agree that it is unfortunate that this investor had to keep his units vacant to maximize value. Society loses that way. I don't blame the investor, though.
Posted by: SausalitoRes at September 11, 2008 8:39 AM
At the time rent control wasn't that big of a deal to landlords. All it did "at the time" was fix current rates. Now it is a whole different story as landlords are saddled with pitifully outdated rates. Maybe you can't fix it with what you call a windfall, others would call justice, but so what? That's what is in order.
Posted by: anon at September 11, 2008 8:45 AM
I have often thought that, if the rental market really tanked and I still was making decent money, it make sense to rent the best rent-controlled apartment I could afford, thereby obtaining a valuable leasehold for myself.
Anyone who obtained a rent-controlled apartment 15 years ago and still lives there is looking like a genius now. A friend of mine has a very nice one-bedroom in Cow Hollow with a modest view of the GG Bridge (tower-tops only)...the rent on that one is up to $1,100 now.
Posted by: SausalitoRes at September 11, 2008 8:46 AM
I guess the definition of "justice" depends on whether you are the current owner of a rent-controlled building.
Two rent-control related measures were on the ballot recently and both failed. They were widely opposed by all but the apartment owners' associations.
As a practical matter, there are more renters who vote than there are landlords who vote. Rent control in San Francisco is not going away, although owners of small buildings will probably continue to pursue OMI and Ellis evictions.
Posted by: SausalitoRes at September 11, 2008 8:54 AM
SausalitoRes... Sounds like the way to go. I would do it myself except I worry about a Greg Wimmer showing up 15 years down the line...
Posted by: chuckie at September 11, 2008 8:59 AM
It is ironic that measures intended to ease housing problems in the City are through market distortions making prices and availability suffer while speeding the elimination of middle class residents. Rent control in San Francisco is going away, it is just a question of how long that will take and how much humiliation will be suffered until then.
Posted by: Mole Man at September 11, 2008 9:08 AM
I think a tenant has more protection in a larger building. There was a Socketsite thread awhile back about how Lembi was offering large buyouts to some tenants in their Clay Street building. Not everyone bit.
Posted by: SausalitoRes at September 11, 2008 9:09 AM
A big part of the shortage in rentals is due to lack of turn-over. I know people who do not live even 3 months in SF but keep their pad in town because it doesn't cost them the real price.
Plus, a lot of people who have been renting for a while should have moved on to either a bigger place or a house. But the cost of upgrading becomes more and more prohibitive as time passes.
Would the end of rent control drive prices down? I do think so. Some people will have to leave town as they cannot afford it and less people plus more supply would probably mean lower prices.
Posted by: San FronziScheme at September 11, 2008 9:11 AM
Teh article in Examiner is unclear about rent control: there is rent $$$ control, and there is rent eviction control.
While everything built after 1979 is under the eviction control, SFH and condo are NOT subject to rent $$$ control.
Posted by: 11223 at September 11, 2008 9:25 AM
I'm struck by the fact there were just 454 Ellis evictions out of 215,000 rental units in the last fiscal year --- a figure that's remained remarkably constant over the past few years. To hear the tenant advocates you'd imagine there was a tidal wave of evictions sweeping through the city, but that's obviously just not true.
Posted by: zzzzzzzzz at September 11, 2008 9:25 AM
I have to chuckle at someone who doesn't believe that getting rid of rent control would lower rental prices. And the argument for that position is current low inventories?!??! LOL. Good work, and good thinking.
Posted by: Treeman at September 11, 2008 9:27 AM
I have a friend who owns and rents out properties in three U. S. cities which do not have rent control. He argues vehemently that he has the right to charge his tenants whatever the market will bear in each of those cities and he brags that he would fight tooth and nail to prevent rent control from ever being implemented in any of those cities. But guess what -- he himself lives in a rent control apartment here in San Francisco. He is well off financially and could easily afford to pay market rate for his SF apartment, but why should he when he can benefit from rent control. I tell him he is the poster child for why rent control is such a fraud.
One of the problems with rent control is that it does little to help people who might most need help.
Posted by: Brian at September 11, 2008 9:28 AM
Re: rent control
How about a compromise. Limit rent control to 7 years and then allow the rate to reset. Provides some stability to renters. Allows the market to turn over.
Posted by: diemos at September 11, 2008 9:56 AM
Teh article in Examiner is unclear about rent control: there is rent $$$ control, and there is rent eviction control.
While everything built after 1979 is under the eviction control, SFH and condo are NOT subject to rent $$$ control.
the problem is that rent control (dollar and eviction) is combined with strict zoning and buidling laws.
there are 2 separate and not equal goals here
1) restrict supply of homes to keep housing prices high
2) restrict the rate of rental price increases through rent control to keep rents on some units low.
these two don't work well together IMO
i would be fine with rent control if they then allowed tons of rentals and homes to be built.
Posted by: ex SF-er at September 11, 2008 10:11 AM
Rents might come down slightly.
For every tenant paying a ridiculously low rent, there are probably three people prepared to pay something close to the current market rent. Particularly in the better neighborhoods in town. That's what an undersupply means.
I don't have any hard statistics to back that up but you don't either.
In the example of an existing tenant paying $500 and new tenants paying $2,500, I think that rents would probably stabilize at modestly below $2,500.
It's not worth sacrificing the city's lower income residents for a bold experiment whose only *known* result would be the enrichment of some landlords. Most of those newly enriched landlords bought their properties with rent control in place and the no expectation that it would be repealed.
The voters rejected rent control repeal recently and we have supervisors who are devoted to rent control. In the real world, it's a non-starter.
Posted by: SausalitoRes at September 11, 2008 10:19 AM
Under rent control, it is a little bit of a gamble to become a landlord of a rent controlled unit.
If everything goes OK, you are enjoying the articially high rent (at least partially caused by rent control laws). If you end up with a protected tenant, you are ded in the water.
That is why I am so picky with tenant for my TIC unit. Anyone that looks older than 35, or overly slim, or overly heavy...............
Posted by: 11223 at September 11, 2008 10:23 AM
As a practical matter, your proposal is how things currently work. I would guess that a large number of rent-controlled apartments turn-over at least every 7 to 10 years. I have looked at a lot of rent rolls of San Francisco buildings and found that to be the case.
The one major exception to that rule is SROs, especially in and around Chinatown. A large number of those rooms are rented for decades to the same protected tenant. Some of these tenants are paying as little as $100 to $150 per month.
I'm as free-market as the next guy (maybe I'd be against rent control if I owned a few buildings), but I strongly believe that rent control is the price we pay for maintaining a diverse population and workforce in San Francisco.
If, as a landlord, you think rent control is a ripoff then don't buy one of those buildings.
By the way, new apartment construction is not subject to rent control. The amount of new apartment construction in San Francisco hasn't come close to keeping up with demand over recent years.
And very little of that new construction is affordable. The City has to mandate affordable housing in new projects or there wouldn't be any.
Posted by: SausalitoRes at September 11, 2008 10:30 AM
In my previous comment, only the first 2 paragraphs were in response to your comment.
The rest of that post was a response to Treeman. Sorry about any confusion.
Posted by: SausalitoRes at September 11, 2008 10:32 AM
"That is why I am so picky with tenant for my TIC unit. Anyone that looks older than 35, or overly slim, or overly heavy..............."
Do you mean pick in terms of who you sell a unit to in a TIC building that you control, or picky in terms of who you select to RENT a TIC unit you own? I thought you could not rent out TIC units...
Posted by: Jake at September 11, 2008 10:36 AM
I mean picking tenants for the TIC unit that I own.
Whether you can rent it, I guess it depends on what the TIC agreement says. In my case, I made it clear to the seller, the rest of the owners, and the bank that it is going to be a investment property for me, before the transaction, and everyone was cool with it.
The current tenants are a nice couple who grew up in NJ, very nice and polite people. I really like them, but I would like them a lot more if that potential "protected tenant" thing is not over my head.
When they first moved in, they called for some minor repairs, which are reasonable requests to me. But I had to force myself to ignore them, just so they have more incentives to move up someday for their own benefit.
Posted by: 11223 at September 11, 2008 10:45 AM
I think 95% of the landlords are doing fine, enjoying higher rent that they otherwise won't be able to without rent control.
But that 5% that ended up with a protected tenant are suffering financially, and that is when rent control laws become unfair - helping preserve the lower income population is the responsibility of the city, not certain individuals.
But the impact of that 5% is far-reaching. People hear these stories, and get scared away. Otherwise, a city like SF should have a lot more rental unit.
Posted by: 11223 at September 11, 2008 10:54 AM
Not knowing you, I have to say that you paint a very unpleasant picture of yourself. Just kind of an FYI.
On topic: I was 24 years old when I moved into a place on the beach. Thought I was going to be there for about 2 years. Stayed 14.
My point: even though you are more then happy to illegally discriminate against potential tenants, there is no guarantee that you will get folks who only stay for one or two years.
Posted by: BRCGranny at September 11, 2008 11:01 AM
Whether I am a fair person or not, that depends on whether you are posting this question to my condo tenant or my TIC tenant. And that is exactly the point that I tried to make here.
Of course, there is no guanrantee how a tenant turns out to be, and that is the risk facing a TIC landlord.
Posted by: 11223 at September 11, 2008 11:11 AM
11223 - do you know how long it takes (and what else is involved) in making someone a "protected tenant"? It's not something that can just happen.
Posted by: anon at September 11, 2008 11:15 AM
Your argument would hold if there was no supply. The fact is there is supply of rentals - just go to craigslist. And as long as there is demand, and supply of rentals, current rents go for the market rate. Unless you're saying the $2,500 charged for this fictional rental is somehow being held down because current landlords are just being nice, then this rental price is where the supply and demand curves meet.
"For every tenant paying a ridiculously low rent, there are probably three people prepared to pay something close to the current market rent."
Well those 3 people are baked into the current demand for the properties for rent. They are the ones keeping rental prices up right now. You're actually supporting my position and not countering it.
Right now, supply is being held down due to rent control. I suppose this is an arguable point - but if we disagree here then the conversation is over as we will never agree on the issue.
I'll let you take it to the next level of increasing supply by repealing rent control.
Posted by: Treeman at September 11, 2008 11:17 AM
A thought on the deferred maintenance: I ended up doing some of that on my own. Painting, fixed a few fixtures, stuff like that. As I started putting my own money into the place, I started to have a stronger sense of the place being mine. I have a few friends who rent who with the same feelings. Consider this: your illegal attempts to push your tenants out may very well lead them down the same path as me.
Most landlords in SF are good folks. They maintain their places and have good tenants. When interviewing for places, I talked to landlords who wanted folks who were going to be around for at least 3 - 5 years. Short term tenants -- I was told -- tend to be harder on the place then long term tenants.
11223, you strike me as a very bad landlord. And, to be honest, I have zero sympathy for your "predicament". It's not like you've owned this place for decades and the laws suddenly changed on you, screwing you over. According to your posts, you went into this with your eyes wide open. Hell, you went out of your to make sure that you could rent a place out that would not normally be on the rental market.
You decided to play the rental game, knowing the rules of the game. I guess it sucks for you that you don't like the rules. And I'm not impressed that you choosing to cheat as much as you can. However, I've got to ask you this:
if being a landlord in SF sucks so much, why did you decide to become a landlord in SF?
Posted by: BRCGranny at September 11, 2008 11:23 AM
Said another way:
Moving along the supply curve does not shift the demand curve.
The only thing that can shift the demand curve is when consumers increase the quantity demanded at a given price. Things like wage increases, natural hazard risk change, gentrification, etc would shift the demand curve.
Posted by: Treeman at September 11, 2008 11:23 AM
Again to answer your question, it depends on whether it is a condo or a TIC. Sure, for my condo unit, I would love for the tenant to stay forever. And in the end, they are paying lower than market rents, just so i do not have to worry about turn over. and full disclosure: I had bath and kitchen totally redone in my condo unit before I put in the new tenant in May.
I don't personally know of any TIC owners who want long term tenants.
Investing in TIC, just like investing in anything else, there is risk associated. Just because there is risk does NOT mean that you are not going to invest, or to invest without due diligence (my screening is my due diligence here).
Posted by: 11223 at September 11, 2008 11:31 AM
There are re-rental restrictions for Ellised units for TEN YEARS.
From the SF Tenants Union website:
"Evicted Tenants Get First Right To Return. The tenant who was evicted has the first right of return at their same rent (plus any increases which would have been allowed under rent control) for a period of ten years. Tenants must notify the landlord and the Rent Board if they want to avail themselves of this option."
Posted by: jd at September 11, 2008 11:36 AM
Evict All Tenants: All tenants in every dwelling on the property must be evicted.
But it seems that the "price controls" only last for five years. From Andy Sirkin's site:
Future Rentals: During the first two years after an Ellis eviction, no dwellings can be re-rented. If a dwelling is re-rented during the first five years, the maximum rent is the amount paid by the evicted tenant plus any rent increases which would have been allowed if the dwelling had never been vacated. In addition, during the ten years after the eviction, re-rental must be first offered to the evicted tenant if that tenant has registered for re-rental.
Posted by: EBGuy at September 11, 2008 11:44 AM
sf apt assoc knows of over 18,000 units that are intentionally kept vacant b/c the owners do not want to live with tenants in their buildings that they will be unable to evict.
as a landlord i think rc is great at keeping rents artificially high.
as an economist i am happy to see the unintended consequences that this constriction of supply causes b/c it offers opportunity to profit.
if we lost rc rents on average would FALL and chinatown and the tenderloin would gentrify big time.
Posted by: paco at September 11, 2008 11:53 AM
Back on topic, my friend did this very move. Bought a 6-unit building, evicted all tenants (including 2 ellis act evections) which took over a year and cost a bunch in legal fees but was do-able. Now he lets family members stay there for free (the law says he can't charge rent, it doesn't say the units must be vacated). So once the five years are up he can renovate and rent out at a desirable leve.
Posted by: anon at September 11, 2008 12:06 PM
paco is 100% right here.
In distorted markets, the losers are always the people who "follow the price signals". Just because *marginal* rents are high, doesn't mean there is a fundamental undersupply or that demand is that high (or deep). It may simply mean that the distortions are not allowing the markets to clear.
A good example is the presence of the 100% financing, no-doc distortions in 2003-2006. People who just followed the price signals concluded that there must be great demand to live in the Bayview because a number of houses sold at over $600K.
Posted by: Satchel at September 11, 2008 12:12 PM
filing an ellis act costs about $7k flat fee to the lawyer for the whole building. then you pay each tenant a relocation fee
of about $4.7k (plus $3k to protected classes).
its not hard.
Posted by: paco at September 11, 2008 12:13 PM
@ Satchel--I'm not sure I understand your point.
How is the tenant willing to pay $2,500 market rent for an apartment a loser for following market signals? And what if the distortions caused by rent control never clear because rent control doesn't go away. Not sure the analogy with the temporary financing bubble is a close one.
Rent control artifically reduces income growth for building owners. At the same time, risk is reduced so owners benefit from lower cap rates. NetNet, it's a loss for the building owners. I can't quantify that by plotting supply and demand curves but the building owners who find creative ways around rent control would seem to agree with me.
I'm not looking to get in a pissing-match with you (or anyone else) but I'm interested in your thoughts on this.
Posted by: SausalitoRes at September 11, 2008 1:03 PM
To respond to SausalitoRes about the benefits of rent control over the "diversity" of SF, I'll counter with the fact that if "freezes" professions in place in this city.
If you're a firefighter, nurse, policeman, school teacher in your 20s or early 30s moving to SF, you'll have to suck it up and live in places twice as small and 3 times more expensive than your colleague who just happened to have arrived 10-20 years before you did. This is social/age injustice 101. People are created equal but laws like these are discriminating to the ones who are supposed to bring youth and innovation to a city. And what about starting a family? Why would someone have the priviledge of raising his kids closeby when the others have to juggle with faraway day cares and commutes that leads women to give up working?
There are so many imbalances created by rent control. I will just stop to these examples or else I'll end up posting ad nauseam.
Posted by: San FronziScheme at September 11, 2008 1:18 PM
"How is the tenant willing to pay $2,500 market rent for an apartment a loser for following market signals?'
No pissing match, SausalitoRes :) I should have been a little clearer. The losers are the people who just follow the price signals, without "adjusting" them by thinking of what's causing them. The smart traders and investors are the ones who profit from thiis understanding - the "winners" I guess.
In your example, the tenant is not really a "loser". Unfortunately, if he wants to live in THAT place in THAT neighborhood and that is what the prevailing rent is, then the tenant has no choice. We all take the market as it comes. IMO, he would be better off looking to rent an SFH (perhaps with friends) because Prop 13 causes rents on SFHs to be artifically low. That's why I rent a $1.2M house for $2800/mo, albeit it is in Tiburon. (I've posted my thoughts many times on why Prop 13 works to effect this "arbitrage" possibility.)
The "loser" IMO is the potential landlord who looks at prevailing rental rates and projects these levels (and even increases) indefinitely into the future. He is then willing to pay WAY too much for the future income stream. Time will tell if I am right, but I think we will see evidence in pretty short order in the SOMA condo market along these lines.
Other potential losers are people who look at the increase in rents over the past year in parts of SF (incidentally, this doesn't seem to be happening up here in Tiburon) and therefore out of panic buy a place at an insane (and uneconomic rent/buy multiple). Or, the people who looked at the increases in prices in SF over the period 1987-2001 and concluded that even marginal places in marginal areas would continue to increase rapidly. Many of them are in the process of being carried out, largely because they failed to recognize the distortion of general prices that can be created when a relatively few marginal buyers bidding with 100% other people's money can create.
I hope that's helpful!
Posted by: Satchel at September 11, 2008 1:36 PM
Rent control should be unconstitutional and this opinion is from a liberal. You buy a property and you should be able to rent it at any rate you can get--period. We have programs for poor people, such as Section 8 vouchers. Private owners of property should not be forced to provide housing at below market costs to anyone.
I'm sorry, but if that turns SF into a Beverly Hills and the average Joe has to take BART from the boonies, then that's just the market working. Also, the city shouldn't prevent anyone from taking a building and converting it into TIC's or condos if that what the owner wants to do.
Posted by: Jack M at September 11, 2008 2:25 PM
So Jack - are you in favor of abolishing Prop 13 if rent control is repealed?
Posted by: Fishchum at September 11, 2008 2:35 PM
You are asking for trouble here. A lot of people on this site will hate you for saying that.
For me as condo+TIC owner, I treat my condo tenant fairly and provide them with their money worth. With my TIC, I got it for less money (compared to condo). I pick tenants carefully, and then just pray that they won't be there forever. If they stay 3-5 yrs and move on, I am in luck. Otherwise, if they stay 10+ years, I might just follow Greg's lead.
In the meantime, if the TIC converts to condo, I will sell it to my 3 year old, and then raise the rent to market level.
Posted by: 11223 at September 11, 2008 2:36 PM
11223 - I believe you must be at least 18 to hold title to real property.
Posted by: Fishchum at September 11, 2008 2:38 PM
I assume you believe that prop 13 is unconstitutional as well? How about zoning laws? Damn zoning laws restricting what property owners can and can't do with their property potentially take MUCH more money away than rent control laws AND distort the natural free market FAR more than rent control laws.
Posted by: Jack checker at September 11, 2008 2:41 PM
Yes, I think Proposition 13 is even more unconstitutional than rent control. I pay over $10,000 for property taxes and most of my neighbors pay less than $1,000. This distortion in the value of the property and therefore taxes, should not take place. If this is all about helping retirees not get priced out of their homes, then providing a break at 65 would have been better.
I would repeal both and require a phase-in of both market rents and market value for taxes over some time period to put everything in balance.
As for zoning, I came from Houston originally and that city has no zoning, which results in commercial and residential sometimes co-existing in ways that are not good. I think if you buy a house in a residential area, then it's reasonable to expect that zoing of the area will remain residential. I do believe that SF "over zones" or to put it another way, they over control every aspect of everything.
Posted by: Jack M at September 11, 2008 2:49 PM
11223 - you're bold going public with your intention to break fair housing laws. And I'm a little disappointed that SocketSite is giving you a forum for doing so.
Posted by: Eric in SF at September 11, 2008 2:55 PM
I am just more honest by saying it out loud. Most people do it anyway. And if you have a law that is encouraging discrimination, you have question the law first, and those who can't resist the encouragement later.
Posted by: 11223 at September 11, 2008 3:19 PM
And Eric in SF,
Words are cheap. Until you are a TIC landlord, and willing to take in a tenant knowing that he will file for protected status the very next day, I don't respect you more than myself. You are still an average person, no matter what you say now.
Posted by: 11223 at September 11, 2008 3:25 PM
You are correct, i don't really know what takes to become a protected tenant. My knowledge in that area is all based on hearsays.
Still, I hope that i will never encounter one.
Posted by: 11223 at September 11, 2008 3:29 PM
I agree 100% with Jack. Can anyone explain why San Francisco is so unique that we need rent control? Why do we need government mandated "diversity" in San Francisco while market forces seem to work in the other 99.99% of the cities and towns in this country? It's just liberal politics.
Paco and the guy in this article are also 100% right. I have at least one of those 18000 vacant units (can you exact source of where that number came from) - and it's gonna stay vacant until I TIC and sell it, let a family member live there, rent it is as a VRBO, or the rent control laws change. In fact I was thinking of inviting Peskin and all his liberal cronies over for cocktails there.
Paco's right with "as an economist i am happy to see the unintended consequences that this constriction of supply causes b/c it offers opportunity to profit."
I've said it a million times on here. Rent controls sucks but it creates enormous opportunities to make money for investors who aren't squeamish about evicting protected tenants and either doing TIC conversions or some derivative of what the guy in the article is doing. If you're a protected tenant (in districts 7 or 8 especially) you're doomed once your building changes hands. The new owner will surely be an investor who will profit handsomely by your eviction.
Posted by: resp at September 11, 2008 3:31 PM
11223, after a TIC goes condo, it is still under rent control until it is sold in an arm's length transaction (i.e. "to a bona fide purchaser for value"). Selling to your 3-year old won't get you there. But you will still be able to sell it for more as a condo, and this law is one of the primary reasons why that is so -- the new buyer won't be under the rent control laws.
Posted by: Trip at September 11, 2008 3:36 PM
If one were to consider the impact of rent control on rent levels, it would look like an exorbitant and unfair tax on landlords.
However, I also know the slow elimination of rent control in New York City (through vacancy decontrol) has had an unintended negative impact on the wealthier residents of New York: Good restaurants and boutique shops are closing - because rents are too high and the cost of living (residential rents) have become too high for qualified workers to live nearby. All over Greenwich Village, decent restaurants are closing shop.
Even if one is a believer in the religion of "the invisible hand" - one needs to take into consideration the adverse impact of not having low cost housing for those working in lower paying but highly-important service industries.
I believe rent control should be means-based not only at the time an apartment is initially rented, but on an annual basis. The current system is simply unfair.
Posted by: marketwatcher at September 11, 2008 3:43 PM
Interesting info. So does NYC pubicly announcement its intent to take out rent control, or is that just your guess?
Someone else also mentioned Boston switching away from RC. So, is SF the only one left??
Posted by: 11223 at September 11, 2008 3:52 PM
How is it that rents can't go up (under rent control), at least as much as the CPI? And Trip, I don't believe that rent control tenants are "qualified" when initially rented, unless it is a affordable housing unit, and that's not the rent control we are talking about.
I suggest that if we have rent control, then the income increase of the tenant should match the allowable increase of the unit. So, if you are a young kid and have a low paying job today, but two years later you're making 200% more, then you rent can go up 200%, or market, whichever is lower. Also, the owner of the building should pay property taxes based on the actual value of the building.
Posted by: Jack M at September 11, 2008 3:52 PM
Jack M, sorry I wasn't very clear. I'm not saying anything about qualified or protected tenants. What I was saying is that condos are not covered by the rent control laws. But when a unit first converts to a condo it remains under rent control until it is sold in a bona fide arm's length transaction, after which it no longer is within the rent control laws. I was just pointing out the problem with 11223's plan to sell her place to her 3-year-old after it condo-converts to try to get this benefit.
Posted by: Trip at September 11, 2008 4:06 PM
Its interesting that no one here will really defend rent control. The best we can get is that it somehow maintains San Francisco's diversity. That seems like really fuzzy logic. How do we know that keeping rent control keeps SF diverse? What would SF look like if we ended rent control? Is there any reason to believe that a significant portion of the people in rent-controlled apartments are in any way deserving?
However, we do know that rent control limits the supply of apartments and causes people to stay much longer in apartments that they would otherwise decide to leave. So rent control definitely contributes to the housing shortage.
The most bizarre argument is that ending rent-control would be bad because it would give a "wind-fall" to property owners. Why is it so wrong that property owners actually get to exercise ownership over their property?
Of course, the real problem is that the SF rent control law is so draconian. If owners could raise rental rates at the level of the consumer price index, pass on tax increases, and charge a reasonable amounts for upgrades/improvements, then tennants would be protected from sudden rate increases but owners would have an incentive to maintain apartments and retain good tennants.
Posted by: NoeNeighbor at September 11, 2008 6:21 PM
11223: Giuliani signed into law vacancy decontrol in 1994. This allows rents for many (not all) apartments to reset to market whenever a tenant leaves. Many tenant advocates are trying to get vacancy decontrol eliminated because it gives landlords too much incentive to harrass tentants that are paying below market rents. One story (probably apocryphal) in NYC talks about a landlord who advertised for musicians for his building - and suggested the space could be used by them for practice. As you can guess, the building was full of rent control residents.
Rent control - like price controls - creates more cheating and market abnormalities than benefits. But of course, the tenant advocates get to feel good about themselves.
Posted by: Marketwatcher at September 11, 2008 7:26 PM
Ahhh, so I'm guessing the TIC unit you rent does not have an Ellis Act on it? I think that is what makes a TIC unit non-rentable for a period of time (5 years according to Sirkin?). I don't think it's the TIC agreement - the TIC agreement, if it has that clause, should only be responding to the Ellis Act eviction. Sorry, don't mean to be a dolt about this stuff, just trying to understand SF's VERY confusing rules and regs. around this, thanks.
Posted by: Jake at September 11, 2008 8:36 PM
Its interesting that no one here will really defend rent control
I have defended rent control, perhaps not exactly in its current form, but it has its strength and weaknesses. Go through the archives if you are interested, I am not going to repeat the same points over and over again.
If you want to worry about "fuzzy logic" you should be attacking the argument that ending rent control would lower average rents. The idea is nonsensical as is obvious by the proponents and detractors of rent control. Is the Residential Property Owners Association so stupid as to actually argue (and put initiatives on the ballot) against their own self-interest? How about the Coalition on the Homelessness and all the other pro-rent control groups?
The posters here are in lala land, there is no point trying to reason with them.
Posted by: NoeValleyJim at September 11, 2008 9:50 PM
In San Francisco, there are three basic kinds of protected tenants: elderly people or disabled people who have lived in a unit for at least 10 years, and disabled and catastrophically ill people who have resided in their homes for at least five years.
So, you can't just accidentally stumble into a "protected tenant". Someone has to be there awhile.
Posted by: anon at September 11, 2008 10:06 PM
The buyers of multi-unit apartment buildings are still stepping up and paying prices that yield only a 4% cap rate. They are counting on higher rents (much, much higher) - are they wrong? (I think so - but I could be wrong.)
Posted by: FSBO at September 11, 2008 10:07 PM
I thought tenants with children were also 'protected?
Posted by: NobHill2008 at September 12, 2008 8:31 AM
^^^No, absolutely not. Now, there's always a chance that a creative lawyer could find some way to keep a tenant with children from being evicted, but there is absolutely nothing on the books that makes tenants with children "protected". Hell, that would make almost 30% of tenants in the city protected.
Posted by: anon at September 12, 2008 8:48 AM
Thanks for clearing that up I was confused due to this passage from www.sftu.org:
Tenants Get Relocation Benefits (With Eviction Notice)—Landlords must pay a minimum of $4,500 in relocation benefits per tenant (including subtenants) plus an additional $3,000 for any tenant who is senior or disabled or living with children. This relocation is above and beyond any deposits and does not prevent the tenant from negotiating a higher relocation benefit. By law, the landlord must pay half of the relocation benefit at the time of the eviction notice and half when the tenant actually vacates. The initial payment is nonrefundable and it belongs to the tenant even if the landlord withdraws the notice or the tenant successfully fights the eviction.
Are 'protected' tenants able to be evicted under certain circumstances, as long as they are paid the relocation $$ stipulated by the city codes?
Posted by: NobHills2008 at September 12, 2008 8:57 AM
Isn't it true that eviction (even after paying the appropriate relocation benefits) is not a slam dunk? Tenants can still request a jury trial - the outcome of which is always uncertain.
Posted by: FSBO at September 12, 2008 9:02 AM
^^^ FSBO - yes there are legal tactics that tenants can use to delay an Ellis act. If the Ellis wasn't done exactly by the letter of the law it can fail. But if it's done right it's gonna work, just may be delayed so that should be factored into your financial decision.
also regarding your prior post, I too can't figure out why buyers pay for such low cap rates in San Francisco, unless the building you're talking about has seven or fewer units - then it may make more sense if the buyer is going to Ellis and do a TIC conversion.
Posted by: resp at September 12, 2008 9:09 AM
Are 'protected' tenants able to be evicted under certain circumstances, as long as they are paid the relocation $$ stipulated by the city codes?
Posted by: anon at September 12, 2008 9:36 AM
@resp and FSBO
Cap rates on apartment buildings in San Francisco are typically reported based on income in place, which is often well below-market due to rent control.
The purchaser is willing to accept low cap rates in San Francisco for 2 primary reasons:
1. Geography protects the property owner from new competition, particularly in established neighborhoods. Compare this to buildings in places like Sacramento, which have much greater risk of competitive development. The lower cap rate reflects lower perceived risk.
2. The purchaser expects to increase income to market over time due to turnover.
Cap rates have always been lower in San Francisco than in other places although the current levels are very low. Buildings selling for a 3% to 4% cap rate now could probably have been purchased at a 6% cap in the early- to mid-1990s. By reducing the cap rate from 6% to 4% over a period of time, investors are paying 50% more for the same stream of income.
For a 3%-4% cap to work, interest rates will have to remain low for a long time. That is possible if the economy gets really bad and stays that way. However, if that happens rents won't be immune from declines...even in San Francisco.
In 1997, I had the opportunity to purchase the duplex I was renting in Sausalito at 12.5x potential gross annual income. I think it would sell closer to 20.0x today.
Posted by: SausalitoRes at September 12, 2008 9:45 AM
"The most bizarre argument is that ending rent-control would be bad because it would give a "wind-fall" to property owners. Why is it so wrong that property owners actually get to exercise ownership over their property?"
This isn't bizarre at all. It is terribly unfair that prior owners of a rental building were not allowed to reap "normal" appreciation and then award all of that accumulated "normal" appreciation to the current owner.
For example, lets say owner A buys a building in 1971 at essentially free market prices. Rent control becomes effective a few years later, creating a distortion that lowers owner A's appreciation. Then A sells the building to B in 2008 for lets say $6M when in a normal market the building would be worth twice that. Rent control is repealed in 2009, making the building suddenly worth $12M so B sells and reaps a nearly instant $6M windfall.
Why does B deserve the $6M profit? B only held the building for a year while A owned it for 37 years while the "shadow appreciation" accumulated. Doesn't it seem as if A was ripped off ?
The conundrum is that the damage is already done. Anyone who's already sold a rent controlled building has forfeited their ability to recover the shadow appreciation. The fairest solution would be to assign the shadow appreciation to a neutral party : perhaps the SFHA where it could be applied to assist low income residents with housing. Wasn't that the spirit of the rent control law after all ?
Alternatively you could track down the lineage of prior owners (many of whom are probably not even alive) and somehow distribute the shadow appreciation to those prior owners in a pro-rated fashion.
I have no idea how to implement either reconciliation though. They both seem to be a bureaucratic nightmare.
Posted by: The Milkshake of Despair at September 12, 2008 9:52 AM
Exactly right. You explained it much better than I did.
Posted by: SausalitoRes at September 12, 2008 9:56 AM
Actually the people that owned these buildings in 1979, when rent control was introduced, are the ones who took it where sun don't shine. If anything, they are the ones who should be paid back, if SF ever decides to end the price controls.
Posted by: chuckie at September 12, 2008 10:19 AM
^^^You're all assuming that the price of buildings would skyrocket, which I think is far from certain, especially considering most of you agree that the price of rents would decrease over time. In buildings where there is a large number of long term tenants, maybe...
Condo conversion controls seem to be the bigger constraint on prices, but again, if those were changed and the market became flooded with buildings converted to condos, would prices necessarily go up?
Zoning restrictions seem to be the biggest constriction on prices. We don't go back and find all of the previous owners to compensate when a piece of land is upzoned (which increases the value of the land substantially), do we?
Posted by: Brutus at September 12, 2008 10:32 AM
"Actually the people that owned these buildings in 1979, when rent control was introduced, are the ones who took it where sun don't shine. If anything, they are the ones who should be paid back, if SF ever decides to end the price controls"
which is exactly what was said. why "actually" ?
Posted by: anon at September 12, 2008 10:52 AM
"Alternatively you could track down the lineage of prior owners (many of whom are probably not even alive) and somehow distribute the shadow appreciation to those prior owners in a pro-rated fashion."
I was responding to The Milk of Despair.
Posted by: chuckie at September 12, 2008 11:00 AM
no kidding. read it again.
Posted by: anon at September 12, 2008 11:07 AM
Yes, no kidding. I read it again.
Posted by: chuckie at September 12, 2008 11:11 AM
OK. Well, you said the same thing as Milkshake yet somehow thought that you were begging to differ.
Posted by: email@example.com at September 12, 2008 11:27 AM
The difference is "lineage of owners" that he mentions. I just pointed out that only owners as of 1979 were affected.
Posted by: chuckie at September 12, 2008 11:37 AM
The difference is "lineage of owners" that he mentions. I just pointed out that only owners as of 1979 were affected.
No he said that. After, went on to talk about a hypothetical amendment plan.
Posted by: SFanon at September 12, 2008 12:00 PM
i disagree in part with milkshake
It's unlikely that if r.c. is repealed the controlled rents will move up to market immediately, as you assumed. The change would probably protect existing tenants for as long as they live in their apartments, and rents would rise to market as each tenant voluntarily vacates or dies. It would be a slower reversal than you predict and hopefully (if us capitalists are correct) the net effect would be a decrease in overall rents based on increasing supply as these units came off r.c.
Yes, I agree current owners would have somewhat of a windfall, but less than you may think.
Posted by: resp at September 12, 2008 12:27 PM
Ok, everyone here seems to be talking about simply the $$$ restrictions in rent control, and how if that were eliminated that the value of those buildings would go up. Can someone explain why you know that would happen? Are buildings in the surrounding areas commanding prices significantly higher than SF on a per-unit basis?
Posted by: Brutus at September 12, 2008 12:44 PM
easy one brutus,
right now there are many nice buildings in the 'loin that sell for less than $200/sq.ft. reason being you are stuck w/lots of people paying little and staying long. if i knew i could remove those folks i'd be all over it and so would many many other groups looking for centrally located rental properties.
Posted by: paco at September 12, 2008 1:13 PM
Wouldn't many of those buildings be SRO's, which are protected from being converted to anything else? (not through the rent control statute, but through other legislation)
My point was that it isn't the $$$ restrictions that are the big problems, it's the other protections (condo conversion limitations, SRO conversion limitations, protected tenants, etc, etc).
Posted by: Brutus at September 12, 2008 1:18 PM
Do you happen to know of one of the nice buildings in the TLoin that sold for $200 square foot recently? I'm curous to see what the restrictions are on that particular building. That price seems low for everything that I've seen change hands.
Posted by: Brutus at September 12, 2008 1:21 PM
Yes, Chuckie, I meant trace the lineage of owners back to 1979. Sorry, I should have been more specific (and couldn't remember the date when RC took effect anyways).
Brutus brings up an equally interesting case of upzoning. Same conundrum there too.
Perhaps one of the main reasons why the city is reluctant to upzone is that they want to avoid exposure to lawsuits particularly from owners who had petitioned unsuccessfully to upzone and then sold just before the city changed their mind and upzone anyways.
The current system rewards political insiders who have advance knowledge of law changes that will affect property values.
(and yes, I believe that repeal of RC will cause a bump of "instant appreciation", perhaps not as large as my example though)
Posted by: The Milkshake of Despair at September 12, 2008 1:31 PM
Do you think that bump of appreciation would be sustained? Or merely a market overreaction?
To be honest, I really have no idea what would happen, unless we're talking about elimination of ALL property restrictions here, not just the rent control ordinance. I think simple repeal of the $$$ part of rent control would do very little, except in a few isolated cases (perhaps some large buildings with lots of long term tenants).
If the market price of rent really is significantly inflated beacuse of rent control, and there really are thousands of units kept off market because of it, I fail to see how the quick drop in rents would equate to buildings skyrocketing in value - unless everyone here is assuming an even greater disconnect would emerge between the income potential for a building and the price of that building. A short term "Yippee! Rent control is over!" bounce seems plausible, I guess.
Posted by: Brutus at September 12, 2008 2:09 PM
Any one can try to make a prediction on how price and rent would change once rent control is lifted. But the fact is that it is not going away, which makes most of above posting meaningless. Sorry to say that.
Posted by: 11223 at September 12, 2008 2:15 PM
Let me throw this one out - pricing for buildings where TIC's are possible seems to be assuming Ellis acting or otherwise selling off the units rather than renting them.
Thus, if you're looking for a small building w/ a little rental income to help you get that first step toward home ownership, you're generally out of luck because the rental stream won't cover the costs of that second unit at TIC prices. Impact - fewer small-time landlords and units available for rent.
Or, when a long-term tenant leaves a small building and the unit is free - that's often a sign that it's time to sell-up as TIC's rather than re-rent. Again, net impact - fewer rental units.
Posted by: G94114 at September 12, 2008 2:26 PM
Brutus - I think that the bump would be sustained (though there might be overshoot at first).
11223 - Given that other cities have repealed RC, why do you think this will not occur in SF ? And note that a similar "windfall generator" of upzoning does happen in SF.
Posted by: The Milkshake of Despair at September 12, 2008 2:39 PM
Everyone is trying to predict what is going to happen to property prices and rents once rent control is lifted. But that is not going to happen, so why waste the time??
Are you guys all professions of San francisco State univ??
Posted by: 11223 at September 12, 2008 2:40 PM
there are only a few dozen sro's and many hundreds of buildings that are not (in the loin and/or chinatown).
its easy to get local sales numbers (rent/sq.ft.,price/unit etc...) from commercial brokers' web sites.
the post and geary corridors are teeming with great looking multi-unit gems.
Posted by: paco at September 12, 2008 4:15 PM
^^^So, you don't have any good examples? I haven't seen any good examples of buildings selling for $200 a square foot in that area with lots of below market renters. Sorry, I simply haven't seen it anywhere I look.
I also have a hard time believing that there are that many buildings packed to the gills with people paying significantly below market, when the likes of the Lembis and others have shown how easy it is to get most of those people out and bring average rents up.
The price of those buildings would certainly skyrocket with repeal of the condo conversion limits and SRO limits (a few dozen are SRO - are you kidding? There are literally hundreds of protected SRO buildings in the TLoin, Chinatown, and parts of SOMA).
Posted by: Brutus at September 12, 2008 4:41 PM
MoD is at least thinking in the right direction, which is how to figure out who the winners and losers are if the law is changed and how to figure out how the winners can compensate the losers somehow.
As long as the debate is framed as in the terms of Rights, as in "it is my land, I have the *Right* to do whatever I want with it" and "housing is a *Right*" (both of which are equally specious and politically beside the point) then we will just remain at our current impasse.
Posted by: NoeValleyJim at September 12, 2008 7:22 PM
its not hard to find info on commercial buildings if you know where to look/who to call. the brokers who deal in this product talk to likely customers. let them know you are serious and you will find out much.
as to your statement that what the lembi's have done is somehow easy...hmm. i don't think you realize how hard it is.
Posted by: paco at September 12, 2008 10:58 PM
There are three parties in rent control, the landloard, tenant, and the city in who's interest ostensibly the unit is under rent control. The idea being that the city is providing affordable housing by forcing the landlord to rent at less than market rate and less than market conditions. Research is rife with studies which prove RC doesn't work. Example, according to SF's own study (SF Housing Databook - 2002) 25% of households in RC units earned more than $100,000. Fully a quarter. No wonder property owners feel rightly screwed.
My suggestion, allow for the progressive elimination of rent control that involves a 3 party. Landlord gets to buy the right to charge market rents by paying the tenant some compensation based on the difference between the market and RC rent. The city taxes this payout on a fixed or graduated basis - ostensibly to pay for affordable housing programs of all types. The landlord gets their property right back, the right to charge market rents. Everybody wins.
There are over 150,000 RC units in the city. If the average tax was $25,000, that's $3.75B for affordable housing. Is that the right number? I don't know, but I have never, never seen the problem fully quantified so can't quantify the size of the fix. Would landlords pay an average of $50,000 in total to buy back the right to charge market rents? What about $75,000? Don't know.
But I do know that in this city where rental housing predominates, where housing is constantly expensive and in short supply, where affordable housing advocates have the ear of elected officials, the only solution is one where everybody landlord, tenant, housing advocates, and elected officials can declare victory.
Posted by: Dede at September 12, 2008 11:12 PM
I'm asking you to provide one example of a building that has recently sold for $200 a square foot with a high percentage of below market renters. You seem unable or unwilling to provide one example.
Posted by: Brutus at September 12, 2008 11:19 PM
I knew a guy once who had rent control apartments in New York and SF. He bragged to me about this and I knew he was a scumbag then.
Of course, prop 13 is rent control for owners.
Posted by: joe shmoe at September 13, 2008 2:27 AM
Dede---Your concern about the number of people making $100,000 who are under rent control is preposterous.
You're completely ignoring the fact that a lot of apartments under rent control have high rents. You could have a family of four in a two-bedroom for $2500/mo. with a $100,000 income. And guess what? They can't afford more.
Their monthly gross is $8333. The rent is 30 percent of that, which is the max recommended expenditure on housing.
Rent control will assure that the landlord doesn't jack the rent $500 on this family. And that -- not an interest in diversity or even affordable housing as traditionally defined -- is the reason for rent control in a place like SF.
It is an anti-gouging statute, nothing more. I find the assumption that rents will go down if stabilization is lifted hilarious.
Here's what will really happen: Landlords will know that tenants fear the costs of moving and looking for a place in an always tight market, so they will jack rents for existing tenants to levels that the open market might not bear.
That's what they did in the 70s, and it's one of the biggest reasons that rent control was put into place.
And the owners didn't really get jobbed. They were charging market rate at the time, and had the opportunity to hike the rents before the law went into effect. When the rents for existing tenants were frozen, so were the landlords' property taxes.
Over time, these people would have lost out if no one ever moved. But what is the likelihood that that happened? Remember that 1979 rents were high for 1979. (if they weren't, rent control wouldn't have been implemented.) The vast majority of those tenants went on to buy houses. Within 5 years, most of the landlords were surely making a lot more money, just not as much as they wanted.
I cannot believe the foolishness here. Well, actually, I can. The anti-rent-control propaganda is as seductive as "real estate prices always go up,'' and how many suckers went for that?
But to set the record straight:
1- Firefighters and police, even at entry level, make a fortune in this city. They make more than a lot of entry-level attorneys, without the huge student loans. They aren't being priced out of the apartments here.
2-The anti-rent control proposal that went down in flames was a statewide ballot measure, so its defeat had nothing to do with the fact that SF has a majority of tenants. The majority of voters in the state are property owners.
3-The double dippers -- people with property elsewhere and rent-controlled apts here -- are in violation of the rent-control laws. They can be evicted and replaced with higher-paying tenants. Their landlords must be content with the status quo.
That said, I think we should establish huge penalties for people using rental stock here as pied-a-terres. I'd say that if they get caught, they should have to pay triple their rent for the period that they had a primary residence elsewhere.
Posted by: mary g at September 19, 2008 5:34 AM
3-The double dippers -- people with property elsewhere and rent-controlled apts here -- are in violation of the rent-control laws.
I did not know that. Can you point me to toward the correct part of the Rent Control ordinance? Thanks!
Posted by: NoeValleyJim at September 19, 2008 7:34 AM
In a free market society, which is what we supposedly live in, it's preposterous to force a landlord/investor/capitalist to bear the full load of subsidising rent (i.e. rent-control or below market rent). If providing affordable housing is on the City's agenda, it should be subsidised by the City (i.e. taxpayer's money). In this case, the landlord would still be subsidising rent but only to the extent that he/she is a taxpayer. In this scenario, the democratic process should ultimately determine if rent subsidy is truly chosen by "the people". In the end, "the people" will vote and the story will have been told.
Social welfare is one of the most important responsibilities of our government. Why is the responsibility being placed on the shoulders of individual citizens?
Posted by: du at September 19, 2008 9:55 AM
^^^We don't live in a free market society.
Posted by: Brutus at September 19, 2008 10:33 AM