The Ellis Act is a provision inCalifornialaw which provides rental property owners in the state with a legal means to go out of business – exiting the rental business short of selling the property to another landlord.
Passed by the California legislature in 1986, the Ellis Act was designed to supersede a State Supreme Court decision, Nash v. City of Santa Monica (37 Cal.3d97 – 1984), that effectively granted cities and counties the power to force landlords to continue to offer their property for rent, regardless of their desire to retire from the business.
In direct response to the court decision, Senator Jim Ellis introduced, and the State Legislature adopted legislation that became known as the Ellis Act. The law prohibited any public entity from compelling owners of any residential real property to offer accommodations in the property, for rent or lease. It set up an unconditional right to out of the rental business and limited the power of localities to regulate the process by which it could be exercised.
Built-in Provisions to Prevent Abuse
In order to prevent abuse of the Ellis Act to circumvent rent and eviction control laws, there are a number of regulations built into the Act which affect owners who, after withdrawing their units from the rental market, attempt to re-rent them. For example, someone who Ellises his building in order to evict low-paying tenants with the intent to re-rent the units at market rate would be in very hot legal water.
If a landlord offers any of his units for rent within one year of the date he Ellised the building, he must offer the rental unit back to the displaced tenants on the same terms as were in effect at the time of the withdrawal if the tenant has requested such within 30 days after displacement. The landlord is also liable for actual damages to the displaced tenant plus punitive damages of up to six months rent, in addition to any other remedies under the law. And last, but definitely not least, the San Francisco Rent Board or other public entity could take the landlord to court on behalf of the tenants for damages, actual and punitive.
Who Invokes the Ellis Act?
Tenant activists would have the world believe that Ellis evictions inSan Franciscoare rampant and threatening its rent-controlled housing stock. Not true. In fact, in 2012 and 2013, out of the city’s 170,000 rent controlled units, there were a total of 192 Ellis evictions, involving 57 buildings. By any measure, one eviction per thousand rental units is hardly an “epidemic” or a “crisis.”
Tenant activists also claim that Ellis evictions are carried out by “greedy speculators” bent on emptying buildings of low-paying tenants – including the disabled and elderly – to sell the units for top dollar as TICs. Again, the true picture is quite different. In reality, the vast majority of the 57 buildings Ellised in the past two years were three and four unit rental properties – the type of small “mom and pop” buildings. SPOSFI does not defend the use of the Ellis Act for purely speculative ends, but we strongly defend the right of small property owners to invoke the law for its intended purpose – to go out of the rental business.
Why Do Property Owners Invoke the Ellis Act?
In many cases, the buildings being Ellised contain long-term tenants paying far below market rent – as little as a quarter of market rent. Such buildings generate insufficient rental income to allow them to be properly maintained. The longer this situation continues, the less the tenant pays towards the increasing cost (both current and deferred) of maintaining the buildings in which they reside. In many cases, the owners would prefer to hold on to their properties, but find that the city’s rent control laws make it increasingly difficult to do so. Selling is an option, but their properties would be worth much less due to their meager rental income and the near impossibility of a subsequent owner increasing the building’s future income in any significant way. Longer-term, it’s an economically unsustainable situation.
For other property owners, the reason for going out of the rental business stems from a combination of factors:
- They are tired of dealing with bad tenants
- Tired of navigating a byzantine Rent Ordinance in an increasingly anti-landlord political atmosphere or
- They’re just tired of being in the business.
For all these owners, the Ellis Act afford the opportunity to do exactly what the state law intended – exit the rental business and maximize the value of their long-held investments by selling the individual units as TICs or selling the Ellised property for someone else to develop.
What the Fight is All About
The Ellis Act provides that if you want to out of the rental business, you can (with appropriate notice) empty your building of all tenants. The building is then restricted from being re-rented for a substantial period of time, and by recentSan Franciscolaw, can never be condo converted. This leaves only the option of selling the building to a group of individuals who own it together and occupy the units as Tenants in Common (TIC), the last option for affordable homeownership. This process is what tenant activists are fighting.
Making it More Onerous to Go Out of Business
With the goal of stopping the process of turning rental housing into homeownership opportunities, city officials are exploring strategies to make it even more onerous for a property owner to go out of business, diminish the value of owning an investment property in San Francisco even more and make creating TICs even more expensive. The only long-term result of these changes will be an increase in the price of housing for first-time home buyers – mostly those who are now tenants and want the security of homeownership. So the battle isn’t between “speculators” and “the people.” The speculators will always make money. The battle’s been between homeowners and tenants and it’s been a constant los-lose for homeownership and property owners.
Efforts to weaken the Ellis Act are proceeding on a number of tracks both state and local levels. All of these legislative efforts, with the exception of one, will produce the same result: higher buyouts for tenants, higher prices to homebuyers and higher rents. Property owners looking to retire from the rental business will become even less interested in renting vacant units, holding more and more of them off the market until their buildings are vacant naturally or they can buy out fewer tenants. Developers who buy multi-family buildings to create TICs will buy out their tenants and not use the Ellis Act at all, resulting in higher costs that will simply be passed on to buyers. Bought-out tenants will end up having lived efficiently rent-free for years.
So why doesn’t the city just force us to give away our apartments for free? That’s not possible because doing so would be an unconstitutional taking of property without just compensation. But don’t these onerous regulations have essentially the same effect?
Reprinted with permission of the Small Property Owners of San Francisco Institute (SPOSFI) News. For more information on becoming a member of SPOSFI or to send a tax-deductible donation, please visit their website at www.smallprop.org or call (415) 647-2419.