The passage of the expansion of eviction controls

On Tuesday at the Board of Supervisors meeting, the Avalos Just Cause Eviction Rent Ordinance Amendment was passed at its first reading 7-4.  This was just one day after the legislation was moved out of the Land Use and Economic Development Committee (Members: Chair Maxwell, Mar, and Chiu) which had voted to refer the legislation to the full Board.

The Amendment would expand the coverage of Just Cause Eviction Controls to post 1979 residential units. As a result, if signed by the Mayor or if a Mayoral veto is overridden, future new residential construction in San Francisco will be subject to the 15 Just Cause eviction controls of the Ordinance.

While passed, the vote count is seen by all as a defeat of the legislation.  With four votes against the Amendment, it can not withstand a mayoral veto.  Since Mayor Newsom has indicated he is not inclined to sign the Amendment into law, the  4 votes against the amendment means the legislation cannot become law.

Of course, votes can and do change and so it is probably too early for anyone to celebrate.  In San Francisco caution is the best political insurance.   

The justification anthem behind the amendment time after time was the “Fairness Doctrine”:  The reasoning being that residents of post 1979 buildings should have just cause eviction protections because residents of pre-1979 buildings have just cause eviction protections. That is the sum and substance of the argument.  This justification was repeatedly supported by the anecdotal statements of housing rights advocates that there is a serious problem.  No verifiable statistics were ever provided to support the claimed need.     

Interestingly, no one made the reverse fairness argument - the protections should be removed from pre-1979 buildings because the landlords of post 1979 do not have the burden. Since landlords of post-1979 buildings do not have these controls, why should the pre-1979 landlords suffer this burden?

During Monday’s Committee hearing testimony, two very surprising, deep information-holes were revealed.

Where have all the lenders gone?
First, while there were many references to what lenders would do when faced with future leading decisions, there was no actual verifiable information from local lenders. No lenders appeared at Monday’s hearing.  No one offered letters from lenders. Instead, broad, vague and misleading statements were made on behalf of mostly faceless lenders.

It does not take a leap of faith to understand and recognize this change would have a negative impact.  Lending is already going through dramatic changes resulting from the economic melt-down and regulation modifications.  Taking action which impacts the value of a security asset will impact the way lenders underwrite loans for existing housing, as well as the loans for new construction. 

While the advocates argue this isn’t rent control, that is little comfort to a new housing developer who is taking a tremendous economic risk in developing housing.  As a developer and someone who sits on a community bank board, as well as on a loan committee, in my opinion this will have a seriously negative impact on the development of new market rate rental housing in San Francisco. 

And given the complexities of the financing of below-market rate housing, it remains to be seen what the real impact will be on that housing.  It would not surprise me to learn that there will be conflicts between our local laws and the regulations imposed on the financing packages.  Those are so complicated, I doubt anyone really knows or yet fully appreciates the impact. 

The cost of a just cause eviction
The second information vacuum was the lack of understanding of the cost of a just-cause eviction. Many of the tenant advocates repeatedly stated that a just cause eviction is no more expensive than any other eviction. This allegation is strongly disagreed with by the property owner community who argue there is a significant cost difference.

Where is the cost increase?
Yes, the filing fees are the same. But the increased cost are not found in the routine expenses. The increased costs are hidden. The increase in costs is found in the increased risk and in the risk avoidance business practices adopted by the housing provider as a result. The increased risk that the owner or manager will make a minor technical error or misread the law, or misunderstand something translates into real dollars in the form of productivity, out of pocket expenses and litigation expenses.

Ask any owner or manager.  The cost of a technical error for a routine non-just cause notice to vacate or eviction is that you might lose some time. The cost of a technical or procedural error for a just cause notice to vacate, or eviction means you will likely be successfully sued.  Once sued, it is likely the owner or the owner’s insurance company will pay out some form of settlement.  This payment will be made irrespective of whether anyone has actually been harmed.  Landlords, managers and landlord-tenant attorneys routinely report that even the silliest of wrongful eviction cases can settle for tens of thousands of dollars; and a serious error can easily reach a 6 figure settlement.

If a landlord fails to dot the “I” or cross the “t”, they expose themselves to potential costs in the tens of thousands of dollars for unintentional, often harmless, errors.  And once sued, the incidental costs mount rapidly.

The incidental costs of a wrongful eviction claim

• First, there is the cost of time. It takes dozens to hundreds of hours to participate in the defense of a wrongful eviction claim.
• Then there is the cost that an owner is now labeled an increased risk by the insurance carrier. This reputation cost can spill over into other business ratings.
• The insurance carrier may decline to rewrite the owners insurance policy at a time when insurance is not all that easy to find.  The loss of insurance coverage is a serious problem in a state where insurance is becoming increasingly difficult to place.
• Finally there is a significant emotional cost.  Few people want to recognize the emotional damage done to an owner and the business when sued but it is only logical that any lawsuit is a major event in ones life.  The fear a landlord feels when sued is just as real as the fear felt by a resident when sued. 

At the end of Monday’s Committee hearing public comment and the discussion, it was obvious the members of the Committee had a pre-defined result and timetable in mind.  It was acknowledged there were additional amendments necessary to fix technical problems already identified by the Committee.  But Supervisor Avalos was unwilling to wait for the corrections to fix his legislation. He was noticeably anxious to get the flawed language out of Committee and on to the full Board.

None of these needed corrections were addressed at the full Board meeting.  The legislation was passed without amendment, despite the comments on Monday regarding the need for additional technical corrections. 

There will be a second vote, after which the legislation moves to the Mayor, where it is expected to be vetoed.  At present there are four votes to sustain that veto, but you can bet there will be serious lobbying efforts by the property owner and tenant communities in an effort to protect or change that important vote count.     

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A prior version of this article was published at Examiner.com.  Merrie Turner Lightner is the SF Rental Business Examiner for www.Examiner.com.