Two-Year Payout For Evicted Tenants Accelerated And ApprovedApril 15, 2014
Originally written to become operative 120 days after enactment, the legislation which will require landlords in San Francisco who evoke the Ellis Act to pay their evicted tenants an upfront sum equal to the difference between their current rent and a market rate unit over the course of two years has been amended to become effective 30 days after enactment and the amended legislation was approved by the Board of Supervisors in its first reading this afternoon by a vote of 9 to 2.
As we first noted last month, any tenant who has not yet vacated their unit by the effective date of the ordinance shall be entitled to the full two-year subsidy, regardless of whether their eviction notice was served prior.
Assuming the legislation is passed in a second vote next week, it will be sent to the Mayor to sign, veto or ignore. The countdown to the effective date will start ticking once the Mayor returns the ordinance, signed or unsigned; a veto is overridden by the Board; or the Mayor ignores the ordinance for ten days.
Positioned as an act “to combat displacement” rather than to discourage use of the Ellis Act which is state law, expect the ordinance to be challenged in the courts after adoption.
UPDATE: We originally reported that the legislation as amended would become operative 60 days after enactment, the amended effective date is actually 30 days after enactment as the entire 90 day operative period has been dropped.
Comments from Plugged-In Readers
Yikes, if it passes 9-2 a veto isn’t going to do much more than delay it a couple days. No doubt this is going to end up in court. Personally I think it is a stupid law although I guess it will likely benefit me by driving up the cost of TIC’s which are what compete with my low end condo.
The BoS is stripping the rights of property owners with this and handing more of it over to tenants and their advocacy groups.
This would not be a problem if rent control did not create such a disparity between the rates of old tenants and market rates, but since the difference can be 10 fold, it will make some Ellis Act evictions financially infeasible.
Wow. That is truly shocking. I’m so glad I don’t own any rentals in San Francisco right now!
Jimmy, yeah, ’cause man, landlords just can’t squeak by with SF rents these days!
Seriously, this is just election year hoo-haa. So the supes running for election get to crow about how they are “protecting” tenants. But there aren’t that many Ellis evictions anyway. This will be challenged in court, probably with a pretty quick injunction halting it, and will almost certainly be struck down at the court of appeal level. Oh, and by the way, the taxpayers will then have to pay the legal fees of the party that defeats it. Your tax dollars at work!
My sense is that the BOS knows this will not survive a court challenge, but they want to be perceived as “caring” and “effective” and get bonus points for sticking it to the “evil greedy landlords”
anon: Not just the legal fees, but consider all that went into trying to pass this in the first place. Legislations are not cheap.
You lived for years with a subsidy from OPM thanks to overly generous obsolete rules. The city declares it to be a cruel and unusual punishment to go cold turkey on OPM
I wonder about the tax implications for the landlord and the tenant here.
Does the landlord get to treat the payment as a business expense? Can it be carried forward over time or does the loss stay in the year the relocation fee was paid? The tax implications might mean the real cost of this thing isn’t as high as it appears (except to the government…)
I also wonder if the tenant has to declare the payment as income (leaving less of it actually available to go towards the higher rent she will have to pay in her next rental)…
So, we’ll now plan to evict ALL our tenants.
No longer is there anything left to loose.
Renters beware of the unintended consequences of talking away the owners rights.
IF YOU VOTED FOR CAMPOS – YOU’RE PROBABLY NOT GOING TO LIKE GETTING EVICTED!!! But because of him, and because he’s made it so unpalatable to be a small mom & pop landlord to provide housing – you will be, and sooner than later.
You can also thanks the housing activists, if there still around – they’ll be evicted too. Nice job SF – way to go on supporting honest tenants and landlords!
This is most definitely a taxable payment to the tenant, just as rent payments are taxable (less deductions) to the landlord. The landlord would be able to deduct the payment, issue a 1099 and then offset any income and/or carry forward losses.
The one thing I’m kind of curious about is that now the BOS has codified “market rent”. Could it be argued that tenants are receiving imputed income each year on the difference between market rent and their rent controlled payment?
parklife – Please be right on your imputed income statement. That would be such a joy for me. Would the giveback be reported by the City to the IRS? State tax due also?
Indeed, I think it’s very easy to argue that the landlord can now issue a 1099 for imputed income to the tenant for the difference between actual and market rent. As a corollary, I would think the landlord could/should also deduct the loss between actual rent and market rent on that same basis.
Perhaps the only question would be how/if the city publishes the market rent equivalent so that the landlord has a sound basis for determining the amount that should be included on the tax return/1099.
It’ll take a fairly aggressive landlord to do this since it’d likely be challenged by the IRS and/or the FTB, but this would be entertaining to watch if it happens.
If you sign a long term comercial lease and rents go up is that imputed income?
If you have a 30-year fixed rate mortgage and interest rates go up is that imputed income?
Different paradigm: These are 1 year (or whatever the term is) leases that are not marked-to-market at the renewal period because of an external factor. The IRS will give you the benefit of your bargain for tax purposes (no matter the length of your agreement) if it is struck at an arm’s length basis. In this case, the landlord would argue that the deal is not struck at arm’s length basis because of the external factor and the tenant is getting a financial benefit as a result (to the detriment of the landlord). Thus, he/she issues the 1099 and takes the deduction.
i feel bad for all the mom and pop landlords. My wife and I rent out a 2 unit building but fortunately both units turned over recently so have market rate renters. its sad, but we try to rent to people who are young and making good money who we think will buy within 5 yrs (such as new couples or wealthy single tech workers). Its unfair but the system makes us do this. Holding on to renters beyond 10 yrs in this city will make you go broke.
P.S. It’s probably one of the big landlords, if anyone, that tries this. They’d likely have the financial resources and the wherewithal to go through the necessary legal/financial/tax machinations of this process. They’d also have a disproportionately larger financial incentive to try to win on this issue because of the long-term positive financial implications of a legal victory.
Ah, yes . . . if it ain’t our local government going all communistic “Peter Pan” syndrome on us again. Yet they get elected over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over and over again.
When will the residents of SF ever learn?
If/when this goes forward SF should offer a discount on annual property tax. Some formula that takes into account the imputed value minus the rent collected. They’re tacitly admitting disproportion, here. Legislating it. So it’s real, and codified, why should only one class (renters) benefit? It’s a slippery slope if and when this goes into effect.
Just another reason to keep rental units off the market.
You San Franciscans sure vote in complete dumb-asses into government.
Thanks to these new laws looks like I won’t be renting out my house in SF for a while. I feel like I should be able to rent my house out for a year or two if the lease states and both parties agree to the terms on a legal document. I don’t get it. I pay my taxes and I pay my upkeep on my house. I should have some rights as a homeowner. I feel rent control is needed, but this doesn’t seem to be the answer and feel a bit out of hand. I won’t rent with these threats. Just a bummer for all parties. I know I won’t be around much for two years and would rather rent but feeling I will never get my house back is kind of scary!
Even if this passes the end result is more Ellis evictions not less. Chui and Campos have chosen an election strategy scaring owners into selling buildings only speculators willing to Ellis will buy and now put a ticking clock on the costs increasing so this will only happen faster.
Furthermore, everyone pays a price for these two narcissistic fools political aspirations. If you do not think they are screwing you, think again, both are knowingly wasting countless tax dollars in taxpayer paid legal fees this “housing crisis” nonsense will garner.
Evil landlord, revenge hungry activist or greed fueled investor or any other voter PLEASE DO NOT VOTE FOR CAMPOS OR CHIO.
Anyone know which supervisors voted against this? Keep redistributing the wealth and watch earners flee…
I am a landlord with tenants that have been in place for 11 years and are now paying considerably below market rent. How am I being bankrupted by this moto mayhem? My mortgage is considerably less than it was 11 years ago, thanks to falling interest rates. I have considerable equity in the building thanks to a robust real estate market. My property taxes remain low thanks to Prop 13. It is true that the cost of maintenance has increased, but I can pass most of that through and write off the rest against my gains. I have yet to pay $1 of tax yet on my income as a landlord thanks to depreciation.
I really don’t understand why landlords in San Francisco cry so much. All of us are sitting on huge gains that have been around for more than a year or two. If you can’t make it with rent control in place, don’t buy. If you don’t like the new rules, sell.
I honestly think most of you are just lobbying for position, hoping that elected officials will pay attention to you. I really can’t figure out why you would make these claims that you are going broke.
NoeValleyJim – I don’t claim to be “going broke”. I do have issues with the erosion of property owner rights in the City. I look forward to the day when the tenant/owner ratio in the City leans toward the owners. I think we have too many renters in the City which adversely affects election results.
@NoeValleyJim – Thank you for acknowledging the benefits of owning/renting in SF. If you bought 10-15yrs ago, you’re making out like a bandit. All because of Prop 13. Only in this city can one household pay hundreds in property tax while their neighbor dishes out $15k+. No wonder the city has a hard time making ends meet.
Ah, tax questions!
Yes, the payment is absolutely taxable income to the departing tenant and a business expense to the landlord (note, a voluntary “buyout” is taxable income to the tenant but might not be expensed as it is voluntary — a close call, but under the new law this payment is required by law).
No, the “imputed income” to a tenant of below market rent is absolutely not taxable income. First, by definition, “imputed income” means it is not real (or taxable, income such as the “income” of the “rent” that a homeowner pays himself). Nor can the landlord expense the “lost” rent caused by rent control as that is not an “expense” cognizable by any tax law. Similarly, an owner cannot be taxed on the difference between “market” property tax rates and Prop 13 rates.
NoeValleyJim, you can only take advantage of depreciation of your rental unit, or deduct any passive loss, (ie offset it against regular income) if you and your wife jointly earn less than $150,000 MAGI. I know you make more than that. Of course, you can still offset any rental expenses from the rental income, as long as it does not fall below $0. There is a carryover, but that does not apply until you sell the place.
I’m willing to wager that this thing becomes mere political publicity stunt me gets reversed in court. But it sure makes for high drama!
As for noevalleyjim’s comment- you can’t generalize. Some LL’s have done very well in frisco, and I’m sure a few haven’t. It’s buyer beware here. SF’s kooky laws have done wonders for me personally, cause I know how to work the system. The more onerous the laws become, the better things are for me.
The politicians here are just so stoopid. They keep restraining supply, and discouraging small owners from renting their units. And RC further restricts availability due to squatting. Works wonders for me and my business model. Thanks idiots!
My coworker is bringing home a couple hundred grand a year yet is paying $1,000 a month rent-controlled. Why he and other affluent renters are legally entitled to be subizidized is beyond me.
Thank you for acknowledging the benefits of owning/renting in SF. If you bought 10-15yrs ago, you’re making out like a bandit. All because of Prop 13. Only in this city can one household pay hundreds in property tax while their neighbor dishes out $15k+. No wonder the city has a hard time making ends meet.
TBK – prop 13 is a state law, so it ain’t “only in this city” where this happens. I’ve got an aunt in Marin living in a house worth at least $2.5 mil or so, and she pays less than $500 a year in property taxes. (she bought in 1977)
I agree that all of the hyperventilation here is uncalled for. It doesn’t even make much sense for those that say they are going to evict all of their tenants now because of this law, since you aren’t going to get them out before the law goes in effect and so you will owe them the payout.
The proper play here is to
1) use the uncertainty at this time to buy an potential ellis property for less (assuming the market is pricing this law in)
2) then wait for the inevitable lawsuit that will likely overturn it.
Another question about the text of this law: does it still keep units off the general rental market for 10 years after the ellis? As I understand the previous law, if a landlord wanted to re-rent before this time period was up, he had to contact former tenants and offer their old unit back at the old rent. Does this still apply if he has already paid them the $$ mandated under the new law?
around1905, my co-worker Ellised his tenants. I believe the time period was 5 years.
He just let his family members stay in the building for free during that 5-year period. I’m sure he received certain benefits from them (e.g. free food, exclusive use of a vehicle at no cost, tax-free cash gifts) in exchange for free rent but was not specifically paid rent.
^ that’s f-ING brilliant. Or, just rent to trusted friends and claim you’re giving them housing free of charge, and tell the rent board to suck it 🙂
LL’s need to start getting aggressive and fight this BS.
Another pet idea of mine- LL’s get together and buy the bldgs that the RC activists rent in- like Welch, gullicksen, that annoying Erin McElroy chick, etc. and either Ellis or OMI their units on principal. LL’s unite!
Chances are they’ll probably get free housing from other rent controlled hogs.
NVJ, good for you for your 10 years. See you in 20.
“NoeValleyJim, you can only take advantage of depreciation of your rental unit, or deduct any passive loss, (ie offset it against regular income) if you and your wife jointly earn less than $150,000 MAGI.”
Is this true, concerning the part about depreciation of your rental unit? I thought the depreciation (along with mortgage interest + property tax + maintenance, etc…) offsets the rental income on Schedule E and the MAGI has no bearing on Sched E calculations. I get the no passive loss on MAGI over $150K, but I don’t understand this part about depreciation.
zapbrannigan, you are right, and I may have misread what NoeValleyJim was saying. You can depreciate (plus the other offsets you mention) to offset your rental income, but not to further offset ordinary income if you make over $150,000. Of course, if you depreciate, you have to recapture that “loss” when you sell and at that point you get taxed.
Yeah, RE depreciation is sweet for those of us who hold for the lllooonnngggg term. And when you’re fully depreciated, you can always 1031 Exchange into something else, and presto, no recapture to pay. RE is sweet if rest of household income is moderate. Real sweet.
“My coworker is bringing home a couple hundred grand a year yet is paying $1,000 a month rent-controlled. ”
My neighbor makes $250k and only pays $1500 in annual property taxes on a property with a market value of $900k.
Yeah, prop 13 and rent control are intimately intertwined, spawned by similar issues. Landlords hate the law that restricts the amounts they can collect in rent, but they love the law that restricts the amounts they have to pay in property taxes!
Of course, as has been oft-noted here, rent control confers a huge financial benefit on SF landlords as it keeps the available supply artificially low (way low) and thus increases the market rent. Landlords benefit from both prop 13 and rent control (although some are unable to grasp the latter fact). Capital wins out again!
UPDATE: Our original report noted that the legislation was amended to become operative 60 days after enactment, the effective date as amended is actually 30 days after enactment as the operative period has been dropped.
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