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.

The Expansion of Eviction Controls: a perspective

The San Francisco Board of Supervisors Land Use Committee has now held two hearings to consider the expansion of eviction control protections to a large class of units that have been off limits to local regulations since the inception of the City’s Rent Control Ordinance . The next Committee hearing is set for December 7th at 1:00 pm in Room 263 at City Hall.

Back in 1979 when they enacted rent control, the Board of Supervisors exempted “new construction,” recognizing this exclusion was necessary to encourage builders to take the risk of adding housing stock to the City. You might say the City offered a bargain with the private sector: build more housing and we’ll keep our hands off and out of your pockets.

Acting in reliance on that promise, builders added thousands of new units, expanding supply. City budgets benefited from the increased tax revenues brought in by new units. Jobs were created by the building of new units and their on-going maintenance.

Despite the benefits the City has enjoyed from this bargain, our City is now considering reneging on the deal. Supervisor Avalos has introduced an amendment to the Rent Ordinance that would strip away an element of the new construction exemption, dragging an estimated 16,200 - 23,000 existing units, with as many as 10,000 additional new units, under the complex eviction controls of the Ordinance.

The justification for the change is found in Section 5 of the proposed Amendment.

“According to information presented at the Land Use Committee hearing, the City’s Assessor-Recorder identified 667 foreclosures in San Francisco in 2008, compared with 81 in 2006 and 286 in 2007, which was a 723% increase in foreclosures over that time period. According to testimony, the Assessor-Recorder has estimated that renters occupy approximately one-quarter of all buildings that receive default notices, the first stage of foreclosure; and in the first two months of a program to notify renters of possible foreclosure (February and March 2009) the Assessor-Recorder’s office sent out notices to 75 buildings.”

The numbers are misleading.  What we don’t know is how many of the 667 foreclosures in 2008 were tenant occupied or post 1979 units. The actual number could be ZERO. The determination of how many units were post-1979 construction could have been accurately determined by the Assessor. It is alarming such an easily determined statistic was omitted. Their statistic for the foreclosure notice program also fails to note how many of the notices went to post-1979 buildings or how many notices went to suspected renters, versus all building occupants. Again, these are easily determined facts.

But if of the 667 foreclosures in 2008, 25% were renter-occupied, our impacted housing universe would be 168 households. But we are only concerned with post 1979 buildings, so assuming 9% of the these 168 foreclosures were post 1979 (based on the largest possible group using the City’s estimated numbers), we are passing dramatic legislation for approximately 15 households. Furthermore, of the universe of 15 possible renter households, we do not know who actually received an eviction notice, or instead received an offer to purchase the unit at a much reduced price, or with attractive financing, or both.  Either option is equally likely. Banks are not interested in evicting people, they are interested in getting these homes out of their REO portfolio. 

Losers Big and Small
In most California cities, a property owner is free to remove a tenant without having to explain why; all that is required is reasonable notice. San Francisco eviction controls remove this freedom, limiting the reasons a landlord can evict to merely fifteen “just cause” situations.

You might ask: Who will suffer from the proposed law and why is it bad public policy for San Francisco to break the promise it made thirty years ago?

The first group of losers includes any homeowner whose unit was built during the last thirty years. Most of us assume we have the right and flexibility to rent out our home for a few months or a year if we need to, and move back in without trouble.  However eviction controls add a significant layer of risk to what most homeowners take for granted as a simple, common sense, right of ownership.

For example, I know of a family who were compelled to use their home as an income earner to help with the financial burden of a seriously ill child. They rented their very nice home and moved to a much less expensive rental to save money. If the Avalos amendment is passed, this family will find getting back into their own home a much more difficult and expensive proposition. They will be faced with providing move-out payments to their renters and having to live with potentially extended notice periods.  Worse, they will have to prove their “good faith” intent to move back into to their home.  Assuming they meet the burden of proving their worthiness to re-occupy their own house, they will be precluded from selling or moving from their home for three years - or risk a wrongful eviction lawsuit.

And what about the condo builder caught in the current real estate market?  Unable to sell units, builders often turn to renting the units to save them from foreclosure. With eviction controls in place, the builder will have no viable way to vacate the units in preparation for sale when the market recovers.  Luckily the limitation of one-owner move-in per building will not apply to this group (thanks to an exemption), but the actual eviction privilege is limited to an owner who moves in and will not inure to the benefit of the builder-seller.  A buyer will have to close escrow on the unit and then begin the process of terminating the tenancy; and then pray the tenant leaves without an expensive legal battle.

Then consider the large institutional developers that have built units in reliance on exemption from both rent - and eviction - controls. While big companies don’t get a lot of sympathy from San Franciscans, anyone with a 401k plan is likely invested in one of these publicly traded REITS, and will take a hit in their retirement pocketbook. More to the point, these institutions have invested hundreds of millions building rental and housing stock for the City, creating thousands of jobs for San Francisco in the process. Will changing the rules serve to motivate them to invest additional dollars of risk capital in the City?

The biggest loser - San Francisco
Investors and risk capital seek stability and predictability. Accordingly, sane investors avoid investing in places where the government nationalizes industries, takes private property through price or use controls, or routinely changes the rules of the game. If the Avalos amendment passes, San Francisco will have sent a clear message to the rest of the world: Do not invest here!

That message will hurt us all - landlord, tenant, homeowner, renter, business owner, employee, vendor, consultant, elected official and government worker. We all rely on risk capital, to provide jobs, to provide opportunity for our young adults, and to provide tax supported safety nets for our sick, elderly and the less fortunate. The City survives because of those willing to invest in it.

Read between the lines!
But you should also be aware there is something more pernicious at work here. San Francisco’s tenant advocates are well skilled at increasing turf inch-by-inch. For example, the Ordinance now covers owner-occupied buildings; the annual CPI rental increase amount minimum was removed and replaced by zero; and capital improvement pass-through rental increase amounts have been cut in half. The equilibrium struck back in 1979 has shifted; and the once workable Ordinance no longer has the balance of give and take it did 30 years ago.

Furthermore, over the last decade we started to see a shift in the numbers of renters to owners. A greater number of San Franciscans’ were becoming homeowners. But now we see a push back in the form of this effort to increase tenant numbers by increasing the number of units covered by the Ordinance.

Whatever is publicly expressed, the Avalos amendment is just another rung on the ladder. Other restrictions will continue to follow. (Consider the recently introduced ban on owner move-in evictions if children are occupants of the rental unit!)  We all lose with the Avalos amendment.  Whatever problem it hopes to solve - and the problem has been neither well articulated nor documented - the price for this solution is too high.

 

This article was first published on www.Examiner.com.  Merrie Turner Lightner is the SF Rental Examiner for www.Examiner.com.