February 12, 2014

Tenant Right Of First Refusal And Assistance Fund Floated

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Board of Supervisors President David Chiu is calling for legislation that would not only give tenants in San Francisco the right of first refusal to purchase their building "at fair market value" should their landlord want to sell, but would also increase the City's Small Site Acquisition Fund to assist said tenants in their purchases.

"We need to do more to put housing in the hands of San Francisco tenants who are in danger of being evicted by speculative investors," said Supervisor Chiu.

The parameters for the proposed legislation have yet to be defined, but similar legislation in Washington, D.C. and Baltimore allows tenants to match sale terms offered by another party. Expect the proposed legislation in San Francisco to include the option for tenants to allow a designated affordable housing nonprofit to act on their right of first refusal as well.

First Published: February 12, 2014 1:30 PM

Comments from "Plugged In" Readers

Ridiculous.

If a renter wants to become a property owner, then they can work hard, save their money and compete in the market with EVERYONE ELSE.

Posted by: Futurist at February 12, 2014 1:45 PM

Madness. The majority of renters have no clue how to own and manage a multi unit building. Even if they bought a 3 or 4 unit property eventually maintenance costs would kill them.

Posted by: SFHelmut at February 12, 2014 1:51 PM

Wait, what?! Didn't the board of supervisors just come out against TIC ownership structures, which is how this would have to be owned if purchased by multiple tenants.
Plus given all cash offers in the market today, I'm not sure how the tenant, with subsidy from the county and or state, would be a "matched" offer.

Posted by: wtfftw at February 12, 2014 1:52 PM

Uhhhhhh, doesn't everyone already have the "right" to overbid on a for-sale transaction?

Does sound like a great way for owners to arbitrage out some city funds though, if such a fund ever really exists... Where will the windfall money come from?

Posted by: soccermom at February 12, 2014 1:53 PM

Co-opization. I don't think it's a bad idea at all. Certainly better than BMRs. Now of course, caveat definition of 'market value', funding level, etc.

Posted by: woolie at February 12, 2014 1:53 PM

I own a small apartment building, and have looked at dozens if not hundreds of others. The spread between market rate prices (and thus monthly mortgage payments) and below market rents is too high for this to help the intended recipients, which I'm assuming is your elderly, protected type. Even with down payment help someone paying $1,000 per month cannot typically just take on a $3,000+ per month mortgage.

This could, however, be a boon to some that can afford market prices, but are taking advantage of our rent control laws. If those types get down payment assistance this is nothing more than a theft of public resources that could be used to provide housing to the legitimately needy. If this were to pass I wouldn't count that out.

Posted by: rabbits at February 12, 2014 2:23 PM

*Under the proposal, a property owner that wants to go out of the rental business would have the option to sell to its tenants at market-rate instead of a short-term investor..*

I don't understand. The owner is selling the property on open market. Doesn't the tenant always have the option to buy the building at market price? What difference does this law make?

Posted by: Wai Yip Tung at February 12, 2014 2:29 PM

Calm down folks! The City already offers down payment assistance and only to income eligible people.

http://www.sf-moh.org/index.aspx?page=181

The down payment must be paid back when the unit sells. I can't imagine this working too differently.

This is the way we need to be helping low-moderate income folks and give stability to our neighborhoods.

Posted by: S at February 12, 2014 2:37 PM

@Wai Yip Tung - giving the tenants right of first refusal will help keep over-bidders out. Purchase price will be based on reality (comps) rather than grow out of a hyper-competitive bidding environment.

Posted by: S at February 12, 2014 2:39 PM

@S-Having over-bidders contributes to the true current value of the property at that point in time. That's reality.

Posted by: Ivan at February 12, 2014 2:46 PM

@Ivan: [your comment makes no sense]

Posted by: sfjohn at February 12, 2014 2:51 PM

So about half of the time, the bidding price go below "market-rate". The tenant do nothing or buy it at open market at below "market-rate". The other half of time, they can exercise the right to buy it at the lower "market-rate", then in turn sell it to the highest bidder and capture the price difference. So this is a right that has finance value similar to option. And basically this law transfer wealth to tenants.

Posted by: Wai Yip Tung at February 12, 2014 2:54 PM

This is nonsense. Good way for Chiu to sound good trying to help the little people, but irrelevant. Tenants can already buy their place if the landlord wants to sell, but they can't afford it. And any funds forthcoming from the city ain't gonna help more than a handful of people.

Nothing to see here.

Posted by: R at February 12, 2014 2:57 PM

purchased the home next to my parents using a right of first refusal last year so i'm not against the concept. also have friends in manhattan who got their coop through such an arrangement.

still wtfftw's points are the right ones. how can the city be against TICs, and small property ownership in general, and be in favor of this? rental stock is still lost. and will that right of refusal price include the costs of TIC legal fees, a maintainance and insurance fund, earthquake retrofitting, and other code requirements that come up on inspection?
if the city was really interested in its middle class residents it would make TIC and condo conversion easier, not harder. and it would spend more time trying to address the needs of teachers and firefighters and social workers (who all make too much to ever benefit from BMR housing but have a hard time getting to city ownership even as neighborhood pioneers).

Posted by: modernedwardian at February 12, 2014 2:58 PM

@Ivan - I don't believe it's necessarily reality, more psychology. Most people have more money than sense and bidding on a home can be more emotional than logical.

Posted by: S at February 12, 2014 3:00 PM

One major caveat with this situation: if the owner indeed sells the building under this principle, this means the tenant has not been evicted prior to the sale.

Now an implicit but essential element is that the tenant is still in the unit. But since property currently rented out under market rate has a much lower value than property that is free of a tenant, even after an Ellis eviction, this doesn't make much sense to the landlord.

They want to give an incentive to the tenant to purchase property at a discount. Where is the incentive to the landlord? If he does an Ellis he can get quite more than what a tenant could offer under this provision.

More posturing to file in the "Try Anything to Show the Tenant Lobby You Care" folder. Supe Attention Whores strike again.

Posted by: lol at February 12, 2014 3:03 PM

@lol where is there mention of a discount? It just says the tenant has right of first refusal to purchase the property at market rate.

Posted by: S at February 12, 2014 3:18 PM

The tenant has already has the right to purchase the property at market value. Submit an offer just like any other person wanting to buy.

What does this legislation do? It sounds like pandering to me. Yet an other example of our City Supervisors spending their time and our money proposing legislation which does not solve a problem but makes headlines. Why don't the supervisors help create more affordable housing; TIC units are the most affordable ownership option in the city.

Posted by: Gary Belk at February 12, 2014 3:24 PM

There is a defacto discount involved. Example, a landlord owns a three unit building with three long term rent controlled tenants in the building. Landlord puts the building up for sale. Prospective buyers look at it and will take that fact and the cost of either removing them or the limited cash flow they produce when deciding how much to bid on the place. If the building was empty and had no tenants in place it would sell for more, but it doesn't, so there is a lower price for the building. The tenants then get to match this reduced value of the building. They know become owners of their units and they can now sell their units and capture the increased value of an empty unit compared to a unit with a long term tenant that is paying below market rate. So there is a discount involved.

Posted by: Rillion at February 12, 2014 3:33 PM

@Rillion

This move is to discourage SPECULATION which it does. A speculator would buy the building with rent controlled tenants, evict them, then re-sell the building for more. The landlord gets the same either way.

If the tenants do get a discount, it's deserved because they also give up any relocation fees they are entitled to.

Posted by: S at February 12, 2014 3:53 PM

I can't possibly imagine that whatever pool of funds was made available for this kind of enterprise would ever be influenced by politicians holding the purse strings, either to favor several tenants or to pay off a landlord who could contribute to a political campaign, right?

I mean it's impossible to think of a way to contravene this process, like it would be SO TOUGH to come up with a shill bidder to puff up the value of a building, and then have the same building appraised by the genius appraisers at the assessor's office to certify the fairness of the price and justify the subsidy.

Thank god this could never go wrong.

Posted by: soccermom at February 12, 2014 3:54 PM

Yes, there is the discount that Rillion explains.

Plus if the tenant does indeed purchase then sells the property later, he can capture the mark-up of the now empty property (which has been untainted by an eviction, since he's the one moving out).

If anything, this is another attempt at transferring a landlord's potential value into the pockets of a tenant. And the tenant would be helped by the City.

Posted by: lol at February 12, 2014 3:55 PM

Just when I though D. Chiu was a man of reason, he comes out with this crap. Him and Campos are in a match to see who can F^&^K property owners more. This legislation will bring the SF property market to a halt.

As a real estate attorney that has drafted many a ROFR, I know that each one has been negotiated for consideration. Now Chiu wants to give it to every renter as a right? WTF?

This constant one-upsmanship between the supes on who can be take the real estate law into full retard mode is a joke. It only makes the price of being a landlord more and more expensive so that quiting the business becomes an easier option. Personally, I prefer not to participate anymore and today I successfully convinced a family member to Ellis a building before all of these restrictions become reality. Thanks to Chiu and Campos, 2 groups of tenants on Potrero Hill shall be homeless in the near future.

Posted by: Hitman at February 12, 2014 3:58 PM

There's no discount for the tenant.

Either the owner Ellis acts, sells for full empty value, and there's no tenants to offer it to..

or if the landlord doesn't Ellis, then there's no difference between what a 'speculator' would pay and what the tenant would have to.

Posted by: R at February 12, 2014 4:02 PM

By the way, Chiu also wants to "reward" owners of single family homes that unlawfully created illegal in-law units by making them legal. However, doing so will also make them subject to the rent ordinance. Don't fall for it if you have an illegal in-law. It is another instance of them trying to F$%$ you.

Posted by: Hitman at February 12, 2014 4:02 PM

Another ridiculous idea from the fringe--otherwise known as the San Francisco Board of Supervisors.
The real estate nazis are at our doorstep.

Posted by: james jr at February 12, 2014 4:04 PM

That is a great point, Rillion. I guess we would see how many of these long-term types are here because they just can't live anywhere else other than the most beautiful city in the world, and how many are here because they're trapped in RC apartments.

Posted by: rabbits at February 12, 2014 4:10 PM

This will just encourage some landlords to Ellis now and reap the financial benefits later.

The Supes are doing everything from the perspective of the tenant. They need to figure out how to benefit both sides if they want to actually make an impact.

I propose allowing owners of rent controlled apartment buildings to rent open units at 60% of market rate and avoid having that lease be governed by rent control restrictions. They could end the lease once it goes month to month. Landlords get enough money and flexibility to stay in the market and people all over the city get rents they can afford.

As a landlord just being able to get rid of a tenant when my needs changed would be worth the financial hit for getting only 60% of market rate.

Posted by: gribble at February 12, 2014 4:12 PM

I'm a landlord of a two unit building (where I reside) and have been following the hysteria from the BOS over the past few months. My tenants are moving out, and all the legislation has fully convinced me to pull the unit off the market for good. I join 7 of my immediate neighbors who are all sitting on unoccupied units because these rules make it too hard to be a landlord...

Posted by: ss at February 12, 2014 4:25 PM

" I join 7 of my immediate neighbors who are all sitting on unoccupied units"

I don't get this. What's the endgame here?
Market rates are very very high right now, so you miss out on years of high market rent and the oppertunity cost of investment returns on that money which can get huge over time.

Then what? Eventually start renting again hoping that market rents have gone up enough to cover all the previous years of market rent and investment returns? Eventually sell it, guessing that a buyout would be more than the rent you passed up?

All the while new market rate units are being built.

I mean, if you seriously thought that rent control was going to be overturned anytime soon I could see waiting a few years. But I don't see that happening

Posted by: anon at February 12, 2014 4:37 PM

The endgame for a 2-unit owner who also resides there would be to pull it off the market long enough to condo convert.

Posted by: Truth at February 12, 2014 4:49 PM

@SS you could sell your two unit or condo convert. two unit buildings go for a premium since they can still condo convert. maybe you could even condo convert but keep the unit yours, exempting it from rent control?

There are options...keeping it off the market seems silly and spiteful to me. You've got yours obviously since you don't need the rental income.. what do you care?

Posted by: S at February 12, 2014 4:53 PM

I have an in-law unit too, which I wouldn't rent out due to rent control. The more I see these laws pass that take away my rights as an owner who scrimped and saved for years to buy property in SF, the less likely I am to rent out space that people really need in this city.

While it is still legal, it's airbnb for me, 28 day stay limit.

Posted by: SFHOwner at February 12, 2014 4:53 PM

don't you people have friends you could rent to? lol an actual in-law to stick in there? haha

Posted by: S at February 12, 2014 4:58 PM

SS is obviously a tenant. He thinks that those of us that have managed to hold on to buildings over the years somehow need their rents that end up being liabilities over the long-run. Some of us don't give a crap about making money - we just dont' want to work for tenants which is what being a landlord is. Being a landlord is a job. Being a landlord in SF is picking up pennies in-front of a steamroller.... it works until you get smooshed. In SF you can leave your building vacant and make much more with less work.

Posted by: Hitman at February 12, 2014 5:00 PM

Chiu seems desperate to get ahead of Campos in this department.

Posted by: EH at February 12, 2014 5:02 PM

Hitman - I think you mean me... I'm not a tenant - I own my own home. being a landlord is work... why buy a two unit building if you don't want to be one. that's my question.

Posted by: S at February 12, 2014 5:02 PM

If I had an open unit, I would airbnb it too. BOS severely trying to screw property owners.

Posted by: Moto mayhem at February 12, 2014 5:04 PM

I dunno... I'd rather have one tenant that I knew rather than a constant rotation of strangers. I have a 30 year fixed mortgage - my payment is not going to change any time soon. Why do I need to worry about constantly getting the maximum rent year after year. As long as I can pay my bills and (and with rents the way they are, the tenants would pay a huge chunk) I'm fine.

Posted by: S at February 12, 2014 5:09 PM

ss wrote:

> I'm a landlord of a two unit building
> (where I reside) ... and all the
> legislation has fully convinced me to
> pull the unit off the market for good.

If your unit is in a decent area you just need to rent to good looking women in their 20's with rich parents since they never stay in a unit for long (they either get engaged, move in with a boyfriend or get money from their parents to buy a place)...

Posted by: FormerAptBroker at February 12, 2014 5:11 PM

Sorry SS - I meant to address Anon.

My family has had a 3 unit building for years. We have had it well before rent control was shoved down our throats. We keep it because it is our family home. In the past we made the mistake of being nice and giving out good deals but we paid for it. I now have it mostly vacant except for one Hedge Fund Manager I rent to - a good guy. Money is not my priority with my building. Renting to good people at a fair price would be the ideal but Rent Control makes it all about profit because neglecting profit motive when selecting tenants makes you a loser in the long-run.

Posted by: Hitman at February 12, 2014 5:17 PM

The proposal is blatant pandering by David Chiu to build his "progressive" chops versus David Campos. Chiu is running scared.

Posted by: Jackson at February 12, 2014 5:29 PM

When will Chiu be out of office?

Posted by: Futurist at February 12, 2014 5:48 PM

I am surprised that the bleeding hearts who run this city don't pass an ordinance requiring the seller to pay the down payment for the tenant and then also pay the first twenty years of the mortgage for them.

Posted by: Mike at February 12, 2014 5:51 PM

Am I missing something here? If the building is not condo'd then wouldn't all of the tenants have to be able to buy? The owner can't sell one unit separately. So if one tenant does choose to sell but the others don't then isn't there speculation on the other units? And then, the other units are occupied so are they evicted by the new owner or... This just doesn't make any sense at all!

Posted by: marvinsnephew at February 12, 2014 7:02 PM

Chiu the next POTUS

Posted by: Truethevote at February 12, 2014 9:11 PM

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