Jump To Navigation

DRAMATIC INCREASE IN ELLIS ACT EVICTION RELOCATION PAYMENTS AND POTENTIAL IMPACTS ON TENANT BUY OUTS

4/16/14

The San Francisco Board of Supervisors has passed an amendment to the San Francisco Rent Ordinance (S.F. Admin. Code Chap. 37) that will greatly increase monetary relocation assistance payable to tenants evicted under the California Ellis Act (Cal. Gov. Code §§7060 et. seq.) Landlords who are exiting the business of leasing residential property under the Ellis Act will now be required to pay tenants displaced from each unit 24 times the monthly difference between an estimated fair market rental value and the rent paid by the tenant under rent control (the "rent differential"). The San Francisco Controller is delegated the authority to determine the rent differential. The Controller has produced an index which will be applied to each unit to determine the amount payable. The index is based upon the tenancy inception date, the current rent, and the average annual rent increase, and creates a single number to determine the rent differential for a particular unit. For example, if the tenancy inception date is 1997, and the current rent is $1000, the market rent difference will be determined by multiplying the current rent by a factor of 2.055. The product $2,055 will be multiplied by 24 to arrive at the sum payable, in this example, $49,320.00.

A similar calculation will be applied to each rental unit to be removed. Thus, for the typically three-unit building with long-term tenants, the relocation costs could easily exceed $150,000.

These new provisions will become effective 30 days after the amendment is signed by the Mayor. Any tenants who are being "Ellised" and remain in possession of their units as of the effective date will be entitled to receive the new higher amount, minus any amount that they have already received under the relocation payments regulations that were previously in effect.

Under the old regulations (as of March 1, 2014), tenants of "Ellised" units were entitled to receive $5,265 each, up to a maximum base amount of $15,795.27 per unit, plus $3,510.06 for each individual senior or disabled tenant.

The Ellis Act permits a landlord to exit the business of leasing residential property by terminating all residential tenancies in the affected building. It prohibits any local government entity such as the City and County of San Francisco from implementing any ordinance or regulation that would compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease. The Ellis Act authorizes local governments to enact regulations to implement provisions of the Ellis Act, but does not override local government's authority to enact procedural protections to prevent the abuse of the right to evict tenants.

Proponents of the new regulations argued that the Ellis Act had been abused by real estate speculators who would evict all tenants immediately after purchasing the building, thereby displacing long-term tenants, seniors and the disabled, in order to profit by "flippin" units to new TIC (tenancy-in-common) owner-occupants. They pointed to a recent increase in the number of Ellis evictions allegedly resulting from the current hot real estate market. They argued that the new regulations are necessary to protect tenants from being displaced out of the city by covering their actual relocation costs for up to two years.

Opponents argued that the new increased relocation payments are really intended to stop landlords from exercising their right to exit the business of leasing residential property under the Ellis Act, without regard to intent to speculate or the lack thereof, and without regard to the economic circumstances of the tenant. The new provisions require a substantial wealth transfer from landlord to tenant, whether the tenant is rich or poor. The new provisions profoundly impact small landlords who have owned their property for many years under rent control. If they are unable to pay the substantially increased reloaciton amount then they who would be forced to continue in business even if they must lose money each month because the rents are so low.

Perhaps in response to such criticism, the Board of Supervisors enacted provisions intended to diminish landlord hardship, by allowing landlords to petition for an adjustment of the relocation payments. The landlord exiting the rental market may request a hearing at the Rent Board to consider all relevant factors, including the number of units in the building and any evidence submitted regarding the landlord's age, length of ownership of the building, ownership of any other buildings, income, expenses, other assets, debt, health, and healthcare costs, and excluding consideration of certain assets, such as assets held in retirement accounts and non-liquid personal property (e.g. art, furnishings, clothing.). It remains to be seen if any landlord will be able to receive such an adjustment.

TENANT BUY OUTS

Undoubtedly the new provisions regarding Ellis Act relocation payments will be challenged, and, if upheld by the trial court, then appealed. The record may reveal that the real underlying intent of the new provisions is to halt Ellis evictions, in violation of the Ellis Act which expressly protects the landlord right to exit the business of leasing residential property. In the meantime, the number of Ellis Act evictions will certainly diminish as landlords will be reluctant or unable to pay such high relocation costs. Landlords will be increasingly looking at other alternatives to free up low-rent units, including tenant "buy outs," that is, negotiated deals under which tenants voluntarily vacate their units in exchange for money and/or free rent.

Previously, some tenants were presented with a frank alternative: accept a higher buy out, or face an Ellis eviction and a lower relocation payment. Since the Ellis alternative has now become considerably more expensive, it is very likely that the tenant's price for a negotiated buy out will increasecommensurately.

The new increased relocation payments are required only for Ellis Act evictions. The relocation payments that are required for evictions based upon owner move-in, owner/relative move-in, and other owner-elective just cause evictions have not been increased. Tenant leverage in buy-out negotiations within the context of these other just cause evictions is not as great is it has now become under the Ellis Act amendment.