Update on Proposition G and Other Anti-TIC and Ellis Act Laws
Five pieces of new legislation introduced to address the TIC and eviction “epidemic”.
As happens each time San Francisco experiences an economic boom, rents and sale prices have spiked, and local politicians and the press are decrying real estate developers, property “flipping”, TICs, and an Ellis Act eviction “epidemic”. (The Ellis Act is a state law that TIC owners and developers sometimes use to evict all the tenants in a building so that it can be owner-occupied.)
So far in 2014, five pieces of legislation were introduced to address the eviction “epidemic”.
Perhaps the most troubling of these was “Prop G”, a proposal to place a huge tax on properties that are “flipped”. The term “flipped” or “flipping” refers to the practice of buying and re-selling a property within a relatively short time. Proposition G would have imposed a huge surtax on property that was resold within five years of when it was purchased. Fortunately, the voters rejected Prop G on November 4, 2014.
Another piece of anti-TIC legislation was introduced in January by Supervisors Campos, Mar, Kim and Avalos. The law would require buildings being marketed as TICs, and any building bought by a TIC group (even if it was marketed as, for example, a non-TIC duplex or triplex), to satisfy all Building, Planning and Housing Codes applicable to new construction, and to obtain Planning Department approval. Buildings that apply for condo conversion are merely required to show that all past work was done with required permits. As a practical matter, it will be impossible for the most older buildings to satisfy new construction standards even if they could get the Planning Department approval. The result would be few, if any, new TIC formations, and a significant drop in the values of 2-20 unit buildings.
The fact that these requirements are significantly more stringent that those applicable to condo conversion show that the measure has nothing to do with code compliance or safety concerns; rather, they are intended to stop prospective homeowners from buying and occupying multi-unit buildings. Past efforts to directly restrict TIC formation have been struck down by state appellate courts on a variety of constitutional grounds, and one can only hope that this measure, if it passes, will be similarly eliminated.
Several other measures target TICs indirectly by focussing on the Ellis Act. In fact, the incidence of Ellis Act evictions is not high by either absolute numbers or historical standards. Only 216 tenants were evicted under Ellis in the year ending February 28, fewer than in most of the last 14 years, and only a tiny percentage of the 825,000 people who live in the City. To put these 216 evictions into perspective, consider that owners unwilling to submit to rent controls now offer an estimated 4,000-5,000 rental units as short-term vacation rentals, and hold an additional 10,000-25,000 apartments vacant. Moreover, in the Ellis Act context, almost all of those evicted are replaced by other SF residents who were formerly renters; with vacation rentals and units held vacant, the available housing stock is simply diminished, putting more pressure on already high rents. But, of course, legislation does not need to relate to the real world in order to get its political sponsors re-elected.
The first of the anti-Ellis measures was SB 1439, proposed by Senator Mark Leno, which would have allowed San Francisco to ban Ellis evictions during the first five years of ownership. Although this measure passed the Senate, it was defeated in the Assembly and has been withdrawn for the moment,
Another proposed Ellis Act restriction, AB 2405, introduced by Assemblyman Tom Ammiano, would have allowed San Francisco to declare a moratorium on Ellis evictions if the City’s housing goals are not met, and would have changed the court procedures for these evictions, making them take years to complete. Ammiano’s anti-Ellis initiative was ultimately derailed before coming to vote in the Assembly.
Locally, a measure introduced by Supervisor David Campos became law in June 2014. It bases tenant relocation payments on the amount that the tenant’s rent is below market. Previously, landlords had to pay each tenant $5,265, up to a maximum of $15,795 per unit, plus $3,510 for elderly or disabled tenants. The new law will dramatically increase these payments in many cases. The Campos law was struck down by a Federal court in October 21, 2014, but that decision may be appealed.
About the Author
SirkinLaw APC was a pioneer in the area of tenants in common (TIC) arrangements involving occupancy rights assignments, which are often used as a substitute for subdividing a property when true subdivision is impossible or unduly expensive. In 1985, Andy Sirkin created the legal and transactional structure which has become the industry standard for this type of TIC. Over the succeeding years, Andy’s innovations have included being the first state-approved real estate instructor for occupancy-based TICs, being the first to obtain state approval for a large-building TIC sale, being the first to convince institutional lenders to offer individual TIC financing, and being the first to develop the loan documents and lender underwriting guidelines for fractional TIC financing. In recent years, the type of co-ownership arrangement Andy conceived nearly 25 years ago has grown to comprise approximately 1/3 of all attached-home sales in San Francisco.
SirkinLaw APC has prepared close to 3,000 occupancy-based TIC agreements for properties of every size and type, and continues to assist in the vast majority of these transactions in California. This unmatched level of experience allows us to offer time-tested approaches for the vast majority of co-ownership situations, to quickly and effectively solve problems, and to produce documents that are clear, easy to navigate and read, and efficient and cost-effective to enforce. We continue to improve our documents each month as we encounter new situations and learn more about what TIC arrangements perform best in the real world. We also share our accumulated knowledge, and support real estate professionals and the TIC community, by continuously publishing new articles on our website and offering free educational workshops.
Our tenancy in common practice involves general advice and counseling, TIC agreement preparation, loan documents, and ongoing consultation to developers, seller, Realtors and TIC owners, on either a flat fee or hourly basis. We have a well-deserved reputation for returning calls promptly and providing fast turnaround times. But more important, we are known for finding creative solutions, calming fears, and finding common ground, so that transactions and relationships work. Although our role usually begins at the time the tenancy in common is first formed or sold, we are committed to remaining available to solve problems throughout the life of each TIC. Contact us via our contact form.