Evictions Are Up In San Francisco, As Are Reported Buyout AmountsJuly 28, 2015
Over the past four months, tenants of 47 rent-controlled apartments in San Francisco have negotiated buyouts to vacate their units, with an average payout of $43,000. The highest buyout was for $310,000.
And in fact, the average buyout reported to the San Francisco Rent Board, as newly required by law, was roughly twice the average of all the offers which had voluntarily been reported to San Francisco’s Tenants Union last year.
As the disclosure of buyout agreements wasn’t previously required in San Francisco, it’s nearly impossible to know exactly how the new law has impacted their use or make any apples-to-apples comparisons. But as the Chronicle reports, eviction filings have increased since the buyout legislation went into effect.
The benefit of quietly negotiating a buyout has been diminished with respect to both disclosure (they’re now public) and impact on condo conversion (they now count as de facto evictions). And as such, it shouldn’t catch anyone by surprise that evictions are on the rise. But in terms of overall displacement from rent-controlled units, there’s no evidence that the law has had any effect, one way or the other.
San Francisco’s Buyout Agreement ordinance is being challenged as unconstitutional in California Superior Court.
Comments from Plugged-In Readers
Payouts are 43k and went up to 310k? Tell me again why there’s so much outrage over these “evictions”? 43k is a year’s rent for a nice 1bd apt in SF. 310k will cover 5 years of rent for a nice 2bd apt in SF or buy a condo in east bay…or allow you to not have to work for a few years
It’s based on the present value of ALL future cash flows, and your time horizon is too short.
My personal situation: I rent a 1 bedroom in the Mission for $1500. Rent controlled. I’ve been there a while, obviously, based on my rent. And I plan to stay for the foreseeable future. Five years, maybe ten+.
If I had to rent a new, comparable apt in my same neighborhood today, I’d pay $3500 (see valgro.com for aggregated craigslist statistics). So after one year, I’d pay an additional $24k in rent. In five years, $120k additional.
Rent control gives me a legal right to stay put and pay only $1500, so for me to voluntarily walk away from that, I would require a large buyout number. Even with a big lump sum, it’s not like I hit the lottery & would quit my job. My personal choice would be to stay in the neighborhood and eventually my higher rent would eat the lump sum settlement.
Note the LL is voluntarily offering these buyouts because they are running similar break-even analyses and know what lump sum will pencil based on future higher rent.
(Note nothing in this post endorses rent control. Just stating an example of why these buyout numbers are so large. I personally wouldn’t have any ‘outrage’ over such a settlement nor I suspect would my LL.. it’s a business transaction.)
It makes total sense. My niece rents an apartment near GG park and pays about what you do. Her new neighbors pay 1500 a month more.
In her case she is thinking of moving only because her mother just bought a nice one bedroom condo near Piedmont in Oakland for under 290K. She vows and declares she won’t leave SF but she doesn’t want 10 years to pass and have only canceled checks (no equity) to show for it.
I wonder how many tenants negotiate a deal then move out of SF to a cheaper Bay Area locale? This is easy to scam but for those who want to stay in SF it is a windfall.
She has the money she’s saving to build equity with. Invest that. Equity doesn’t need to be in the shape of a house.
If your landlord Ellises you, he won’t owe you more than 13K or so.
He can TIC-convert the building with your then vacant unit or just wait out 5 years and re-rent at the market price.
I haven’t seen any reports of Ellis-then-leave-vacant buildings, but as the numbers approach these absurd levels, why wouldn’t one? $310K pays 5 years of interest at 6% on [one] million dollars in simple math. Wait it out and then sell it to the next person or rehab and rent at then market rates.
Actually I heard of one case a few years back. Old timer owned the bldg with low mortgage, and had 4 low rent hanger ons. So he just ellised, got to take his time with renovations, and come year 5 funded his retirement. Poetic justice.
I forsee more of that happening. 5 years’ vacancy is looking better and better vs several > $100k tenant payouts. Plus the satisfaction of not paying those obscene sums to hanger ons; only $16k and a satisfactory kick in the *ss. More LL’s should be doing that on principle.
Steeply rising rents, the opportunity cost of leaving a unit vacant for 5 years is that much higher. A smart landlord interested in maximizing her/his profits would split the difference with their tenant rather than just let the unit sit empty foregoing very high rents. A LL following your “principles” for the “satisfaction” of “kicking someone in the *ss” would lose money.
The opportunity cost of renting out 5 years ago and getting stuck with a low paying tenant is real too.
Say someone has a 2-bedroom with a rent-controlled tenant paying 1500 in 2010. He decides to stay put.
Say someone has a 2 bedroom for rent in 2010 (after a buy-out). He rents it out, at 2800. Since rents have skyrocketed between 2010 and 2015, his tenant will stay put for 10, 15 or 20 years
Say the same person decided not to rent until 2015. He finds a tenant at 4300, or 1500 more than the other scenario.
What do the next 20 years look like? Assuming all tenants decide to stay put.
The total rent collected for scenario #1 for 25 years = 1500*12*25 = $450,000
The total rent collected for scenario #2 for 25 years = 2800*12*25 = $840,000
The total rent collected for scenario #3 for 20 years = 4300*12*20 = $1,032,000
Doing an Ellis has to be weighed very carefully, but the 5 year waiting period is repaid very quickly IF you can capture market rent after the expiration. IANAL.
sFs, the odds of a 25-year length rental tenancy in San Francisco are less than 10%. You have to factor the odds of the various results into any calculation of the expected outcomes of your scenarios. Many people with below market rate rents and rent control move every year due to other factors.
True but their likelihood increases as rents paid get more and more disconnected with market rents. You can hope for the best but plan for the worst, and with Ellis at least you know where you stand.
are you OK with extorting money for something you ahve no legal right too? i find it to be morally reprehensible
Oh, but displacing someone who’s done nothing wrong is morally okay with you?
You can’t honestly use “morality” as an argument if you’re going to turn around and defend the free market. The free market is amoral at best.
Consistent with your logic, if some wealthy Prince bought all of the property in San Francisco and forced the entire population to move (including yourself), would you be okay with that? On moral grounds? Probably not.
How would Prince buy my home when it’s not for sale?
“Oh, but displacing someone who’s done nothing wrong is morally okay with you?”
Yes, with possibly some exceptions (elderly tenants, etc)
Private landlords shouldn’t be forced to provide a benefit that cities or other agencies should be providing. That’s why they pay taxes.
Only in San Franciscostan could something as simple and logical as allowing some control over private property be construed as a horror. MOST cities in the world don’t have these ridiculous protections for tenants and manage just fine. As much as you’d like to, you can’t suspend reality and economics.
If you want to make the argument that the state should have a robust budget for providing and maintaining affordable housing for the working class, then I’m right there with you.
But that is currently not the case, so we are playing with the cards we have been dealt. But to turn around and make an argument in favor of the morality of the free market is overly simplistic, hence my original rhetorical question. I’m not trying to ignore basic economics, I’m simply providing the rationale that provides tenants with at least some sort of leverage to stay in the city without being ruthlessly displaced by unfettered and amoral economic forces.
And by the way, a large reason why we don’t have a robust and inclusive state-run alternative for housing the working class is precisely because those with capital have historically opposed it in favor of “private” alternatives. They’ve mostly won the battle between public and private housing. So no, they don’t get to cry about “morality.”
the morality argument is that you are extorting money from an owner to move from HIS property. if im renting a computer at staples, and they kick me out, i am not going to ask them for money and argue “displacement”. its their store
People are displacing other people all the time in the rest of America!
The standard lease is one year, then month-to-month and the landlord can ask for the tenant to leave. “I am selling my place, please vacate!” is heard everywhere in the country.
But of course they have little interest to do so without a good enough reason since they can adjust the rent freely. This makes for a much more balanced “business relationship”. I give you money, you give me shelter, and the amounts of money exchanged are whatever the renter pool wants to pay. It’s a relationship of landlord and tenant, not equals, since only one party OWNS the property and can choose to rent or not.
In the non-Bizarro-world-of-San-Francisco the only way you will have a higher level of housing stability is by OWNING YOUR OWN PLACE. A concept known as “home-ownership” which doesn’t guarantee permanent housing, since you still have to pay taxes, fees, utilities. But it’s simple enough. Buy a place, stay current on the expenses, and you can stay all your life and give your house to your kids. Isn’t that beautiful?
Only the spoiled brats of the rent controlled cast of San Francisco will expect to stay in the same home they do not own for the rest of their lives. Of course, they stay mainly because it’s dirt cheap. And it’s dirt cheap because of the idiotic rent control.
The first step would be to do means testing on rent controlled tenants. Why would someone who can afford 3000 would pay only 1500 when someone else is ready to pay these 3000? What gives that person the right to hog a space he cannot afford today, simply because he could afford it yesterday. Why is the new family denied housing, and why do they deserve LESS than the older tenants who failed to keep up with their environment?
Call me heartless, but for one granny hogging a 4BR for $850, there’s a family of 6 that can afford $4000 but cannot live in SF because supply has been distorted by the space hogs.
Make me an offer!
Prince wouldn’t make you an offer.
He’d challenge you to a game of basketball for your property and then make you pancakes.
“Oh, but displacing someone who’s done nothing wrong is morally okay with you?”
Yes. That’s the American property system, and not only is it efficient, it has served us well for centuries. The risk-taker (i.e., property owner) ought to reap the reward of appreciation.
No legal right? Check again.
“Legal right to stay put”
That is what I think is so backwards. That a private landowner/landlord is forced to house people in his or her building for less than the market is willing to pay, and if they want that market rate or to convert or do something of that nature with their own building, which they pay taxes on and maintain, then on top of already not receiving market rent on an existing unit, they must pay the existing unit’s tenant some negotiated, possibly arbitrated lump some (plus potential legal costs of course).
Yes, it’s a really messed up situation. Why would someone want to own a rental property in SF?
Buying in 2010 and staying away from regular rent controlled leases was the best decision I have ever made. Choose your time well, then find a way NOT TO sign a regular lease and still collect market rent.
because it pays my mortgage?
we bought a vacant 2 unit in 2009 and gut remodeled to appeal to higher end renters. our rental unit currently rents for $4650 paying most of our mortgage/taxes. the mortgage is a 20 yr 3.25% that we overpay. if it was to rent now it would go for $5500? so some would argue we are “losing money” ($850 monthly) but stability counts for something once you exceed your planned ROR and our home is mostly peaceful.
the $900K building is now worth north of $2.5MM. it will be ours debt free before we retire.
i silently thank my tenant every month when i cash the check.
still not clear why anyone paying $4650/month needs rent control (their household income makes them true 1%ers).
our tenants here and in montreal tend to turn every 2-5 yrs as life and career choices take them elsewhere. have had one eviction to structurally remodel in 20 yrs.
This is all routine stuff. An example – we signed a lease on our Palo Alto space (3 floors in a commercial building) in 2005. Low rents then as there were still lots of dot-com bust spaces. 10-year lease with a 10-year option at just a small increase. We just moved into the space of another firm we acquired. Market office space rents are way, way higher in Palo Alto now. We could get around $900,000/year in excess of our lease if we were to sublet it. Landlord just bought us out for a lump sum payment of $7 million – everybody wins.
Of course, we had the legal right to stay in the place at our below market rent, because we had a lease. And we had the right to negotiate a buyout so that the landlord could rent to someone else at a higher rent. Not “extortion” or “immoral” even though the landlord was paying all the upkeep and taxes and only receiving a sub-market rent. We made a good deal, and the Palo Alto landlord made a bad one.
No different when a rent-controlled tenant does the same thing. The tenant has a life lease by operation of law that the landlord freely entered into. SF landlords who complain about this just want a handout to get out from under their bad deal. They have options (e.g. Ellis) and they should either take advantage of them, or find a more suitable line of work. Their belly-aching certainly will get them nowhere.
This makes sense. Commercial leases are 5-7-10+++ years, often with options, etc. In that time markets can really change, and I get the financial sense of a buyout to enhance the credit of one’s tenant roster (potentially) and/or reset rents to market.
But with residential, typically we’re talking 8-16 month terms, at best, or maybe month to month as so many renters likely find themselves in after getting past that initial 12 month term and just “staying put” without notice from landlord demanding a new term/contract/lease.
I don’t quite see the analogy to commercial lease buyouts. A commercial lease might even have a buyout clause, like it would have a termination clause for the tenant (tenant must pay x to terminate early at their option and provide y months written notice, etc). Residential leases that I have signed typically have termination clauses for tenants, but it’s landlord friendly in that landlord requires 30-60 days notice and gets to keep security deposit in full, or something of that nature. I’m quite astonished that it’s the other way around in SF, and it sounds like even so with non-contractual month to month leases (which I guess in SF are a legal “life lease” right…oddly).
I’m not anti-buyout solution; I’m just floored that this is essentially what’s required. SF is extremely tenant friendly and landlord unfriendly. I’m fairly positive it’s the reverse, or at least “normalized” in every other city in America.
Maybe I don’t have an understanding of the law since I am not a landlord, but it sounds like no matter the circumstance, there is some required payout to get a tenant out of your building (if you don’t want to go down the long CA eviction process). In my mind, Month to Month is not “Contractual Life Lease as authorized by the law”. Month to month in my mind requires nothing more than proper notice by either party. But again, SF is a little different in this respect than the rest of the country (as it is with rent control, too). In most parts of the US, rent control or not, a tenant protects his or herself with a contract that includes term and rent spelled out. There is no protection otherwise.
I just want clarification here, really to my own benefit, as I plan on taking advantage of whatever whacko tenant friendly laws there are in SF that I am unaware of.
“Month to month in my mind requires nothing more than proper notice by either party. ”
But that is not the law in SF (at least for pre-1978, non-condo, non-SFR buildings). In SF, a landlord knows that if he leases a unit for 30 days or more, the tenant has a life option to renew that lease month to month at the same rent (plus 60% of CPI each year). Landlords should set their rents accordingly. I agree the law is dumb, but it has been the law here for a very long time (37 years for some units, 21 years for others). If landlords made a bad deal and bet the tenant would not stay too long or charged too little, that is the deal they have to live with. They have some outs – a buyout, or Ellis, for example – and they should use those if they feel the need to do so. Otherwise, they have to stick with the deal they freely chose. That is basic contract law.
Yes this is definitely a business transaction. But this is not the way this was imposed on the landlords.
Tenant advocates have sold the voters the “we need more protection” precisely because they didn’t want this to be about a simple business relationship. For activists housing is a right, and tenant protection/price control is given to make certain the business aspect will not grind people in its path. With this sort of logic, rules can change at will(and they do) which nullifies the fair business aspect of the transaction.
You purchased a property on Year 0 and proceeded to adding a tenant. On Year 1 you are told that the OMI you could do repeatedly is now a one-time deal. Then on year 2 you are told that this OMI will require you to stay in the place for x years. Then on year 3 you are told that you cannot rerent for 5 years if you do an Ellis. Then on year 4 you are told an Ellis will disqualify your property from the condo conversion lottery. Then on year 5 you are told there will be no more condo conversion lotteries. Then on year 6 you are told that your property cannot be rented short term if you do not live on the premises. Then on year 7 you are told that the buyout you might offer will be now considered an eviction.
I could go on for hours.
Just imagine if the commercial lease business had new rules restricting what a commercial landlord can or cannot do with his existing leases? You’d see people picketing City Hall with signs saying “Defend free markets! Say No to Communism!”
Agree that an electorate made up of tenants is going to pass laws that favor tenants. That is called democracy, and sometimes the result is laws that favor the majority. You want to start complaining about laws that I disagree with but the majority favors, and I’ll be listing those all day.
As to your example – those are the fringe. The “wanted to OMI and then the law changed” scenarios are relatively rare, and they do nothing to establish the broader point. Most of the landlords screaming about rent control simply want to charge more – i.e. they want to get out of their bad deal. They are not complaining about OMI or Ellis rule changes. That vocal majority has nothing to complain about except their own bad business decisions.
Yes it is called Democracy but one could argue that the law voted by SF are sometimes struck down because they do not comply with state or federal laws. The laws that are struck down (or not) are often done so not because of the pure interpretation of the law, but on the political environment that will be present at the time the issue is debated.
From what I understand, given the right political environment, rules voted by the SF voter could perfectly be struck down without any voter having anything to say about it. Voters cannot vote themselves everything and anything.
Democracies are also supposed to protect minority rights. If it wasn’t for state or constitutional law, I’m sure SF would have passed property laws tantamount to takings a long time ago. And as for this being all fair and good and part of the democratic process, it is not. It is actually a perversion of the democratic process to purposely pass laws, which are binding for awhile, until they get overturned in superior court. How many times has that happened? A lot, as supervisors cynically pass one ordinance after the other, knowing that they will likely get overturned. How exactly is all this just “part of normal business practice?”
Not all landlords “freely entered” into there life leases by operation of law. Some leases were signed under different terms and were forced upon LL’s by the people’s republic. Your short-term memory is selective.
I suppose you think the buyout legislation is ok too, Counsel?
JR Bob: It’s COMPLETELY different than when a rent-controlled tenant in the case of a landlord that that bought prior the SF Rent Control Ordinance coming into effect. A lease is a mutually agreed upon contract. Rent control is a law that simply confiscated income from a set of victims: landlords who bought before the law was passed.
While landlords who bought after the rent-control ordinance passed walked into this eyes wide open, every law that passes makeng evictions or OMI harder or more expensive is a form of taking as well. And is immoral for those of you tracking the morality question… And should have been ruled unconstitutional by the Supreme Court in that NYC case, but as we now know, they’re a bunch of unprincipled leftists.
I agree that people who bought a non-RC building that later got turned into RC got screwed. If anyone can legitimately cry foul, that is the group. But:
1) We’re talking purchases made more that 21 and 37 years ago (depending on the building type) – relatively small numbers of tenants still in those units after so long, but, yeah, I have some sympathy for those few landlords;
2) Land use changes are enacted all the time, so that’s a risk of being a landlord that you accept by going into that business;
3) Anyone in SF in this situation (purchasing more than 21 or 27 years ago) has seen the value of their building increase somewhere from millions to tens of millions of dollars. So what? I agree. But that is not a very sympathetic position from which to whine. You don’t like it? For chrissake, sell and live the high life. That certainly beats belly-aching on chat boards.
Appreciation is a totally entire issue. If you hold a company stock that has a lousy dividend but had great appreciation because other stocks in the same category were performing great and pulled the whole category upwards, do you rationalize the lame dividend with the stock’s appreciation? Nope, you pressure the company to get its act together and fix the underlying issue.
You could say investors in TWTR should be happy the stock appreciated even though it’s not turning a profit. For rent controlled apartments, the underperformance is a given and not easily fixable.
Appreciation is not guaranteed, but keeping a low-paying tenant
“No different when a rent-controlled tenant does the same thing. The tenant has a life lease by operation of law that the landlord freely entered into. SF landlords who complain about this just want a handout to get out from under their bad deal. They have options (e.g. Ellis) and they should either take advantage of them, or find a more suitable line of work. Their belly-aching certainly will get them nowhere.”
Your analysis is flawed. The tenant does not have a life lease. Rather, tenant is essentially given a mandated low-cost option for a life lease. Such a system is inefficient and bad policy.
Wow, talk about a fantasy. Only in SF could you possibly believe that you have a “right” to subsidized housing paid for by a private landlord.
Buyout = extortion.
Yes, but I love how this is backfiring big time in the face of tenant activists. Since a buyout is now technically an eviction, there is no interest in going soft on the tenants, especially those who would have expected 100,000s in buy-out money. Just Ellis and be done.
Right? If my landlord sold and I got offered that I’d be in heaven…just enough to make a move to San Diego!
so if the law gets repealed, will those who got a payout need to pay it back?
I would assume so.
Of course not. But once superior court tells sfgov to shove this overreaching legislation, buyouts will again be the purvey of the interested parties (landlords and tenants.)
Ah the good old law of unintended consequences. If a buy-out is considered and punished like an eviction, then landlords do not have to bother with buyouts anymore, except maybe for expediency.
The SFTU should backtrack because a lot of tenants they protect will be hurt by this WHEN/IF their time is up.
What percent of apartments are under rent control in SF? It must be slowly diminishing as new apartments get built (exempt) and conversions occur. Add to that vacancy de-control which allows catch-up to market rent with rent control imposed from that point on at the new market rent.
If I remember right, about 60% of SF’s housing units have rent control (as of a couple years ago).
60% of all housing units are tenant occupied. Rent controlled? Not 100% and by very far since there are post-1979 units, SFHs, condos. A ballpark figure of rent controlled units should be at around 40%.
40% of the 60%?
are you saying 60% of rental units were built after 79? that seems high
A ballpark figure of rent controlled units should be at around 40%.
meaning that of the 60% tenant occupied units, probably in the range of 60% would be rent controlled, giving a very rough estimation of overall rent controlled units of 40%.
I think it’s higher, that non RC units are between 15-20%of all rental stock. Remember, most post 79 construction is owner occupied.
You have to take into account SFHs that can also be rented, condos, anything constructed after 1979. Probably more than 20% of all rentals.
Ellis Act will continue to RISE RISE RISE in Mission thru 2020 due to many low rise buildings easy to act upon.
Moratorium will only exacerbate this issue.
How are low rise buildings easy to act upon under the Ellis act?
….because they are typically 3-6 unit buildings, and therefore at an *easier* price point to purchase, in comparison to much larger buildings.
Anyone up for buying & ellis’ing a few in the Mission, if we all chip and buy a few the neighborhood will be so much nicer? And we’ll be able to sell them at decent prices. These units are probably the most cost efficient for first time buyers. SF is so screwed, and the progressives did it to themselves.
Low rise buildings in the mission are usually under 6 units which greatly reduces the potential for a tenant mix of new and old this the income usually does not support the purchase price thus the only investment strategy that truly makes sense is to empty them and sell them ass TICs and use the return to invest in bigger assets.
The real winner in all of this is the IRS.
I look forward to the mob protests outside the new homes of tenants who have received massive payouts – The SFTU and their buddies will protest the tenants – saying “Greed! Greed! Greed! You received $300,000 to give up your apartment and you didn’t give that to any of us! Shame! Shame!”
It’s a gravy train. Just wait long enough, the train will stop at your station some day. What matters is that the train must keep rolling, and this is what the SFTU is doing.
I wonder if “speculative buyout tenant” is a career path. I have a friend who’s mom got bought out three times, making well into 6 figures of passive income.
It could be in the City. Do you know if your friend’s mom declared these buyouts on her income tax?
I thought landlords were required to send that to the IRS?
Simple 1099 issued to the tenant will do it for the IRS. The taxes owed by tenant is a moving target based on the tenants annual income.
If only Silicon Valley weren’t such an armpit of a place and had some culture…maybe the young and the spoiled would live closer to work. They could gentrify Race Street …
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