BILL ANALYSIS Ó SB 1439 Page 1 Date of Hearing: June 18, 2014 ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT Ed Chau, Chair SB 1439 (Leno) - As Amended: June 12, 2014 SENATE VOTE : 21-13 SUBJECT : Residential real property: withdrawal of accommodations SUMMARY : Allows the city and county of San Francisco to restrict Ellis Act conversions for property owners who have owned their rental property for five years or less. Specifically, this bill : 1)Allows the city and county of San Francisco to do the following through an ordinance or ballot measure: a) Prohibit an owner of a rental property from filing a notice to withdraw a property from rent, under the Ellis Act, unless the owner has owned the property for five continuous years or more. Requires that if the owner is not an individual person, then all persons or entities with an ownership interest in the property must have held the property for five years or more. b) Prohibit any person or entity that withdraws a property under the Ellis Act from withdrawing another property if it is purchased within ten years of that filing. c) Prohibit any person or entity with an ownership interest in a property from acting in concert with a co-owner, successor owner, prospective owner, agent employee, or assignee to circumvent the above prohibitions. d) Require an owner notifying the city and county of San Francisco of an intention to withdraw a property under the Ellis Act to include in the notice, the identify of each person, entity, and members of an entity, with an ownership interest in the property. 1)Exempts owners who are natural persons, own no more than two properties, and own no more than a total of four residential units, from the requirement to own a property for five or more SB 1439 Page 2 continuous years before withdrawing the property from the rental market under the Ellis Act. 2)Provides that a violator of any of these provisions is liable to the tenant for actual damages, special damages of at least $2,000 for each violation, and reasonable attorney fees and court costs as determined by the court. EXISTING LAW : 1)The Ellis Act prohibits a public entity, by statute, ordinance, or regulation, from compelling an owner of any residential real property to offer, or continue to offer, the rental units in the property for rent or lease. (Government Code Section 7060) 2)Authorizes a public entity having a system of rent controls to require the following when the owner of a rental property subject to rent controls has exercised his or her Ellis Act rights: a) If the property is returned to the rental market within five years following the filing of the notice of intent to withdraw or within five years after the property's withdrawal, the rental unit must be offered at the rent level, as specified, in effect when the withdrawal notice was filed; and further, if that returned rental unit is offered again for rent at any time during the five-year period, the rental rate for any re-rental of the returned unit shall be that rent level. b) If the property is offered for rent within two years the property was withdrawn from the market: i. the property owner is liable to any evicted tenant for actual and exemplary damages; ii. the public entity may also sue the property owner for exemplary damages for the displacement of tenants and lessees; and iii. the property owner must offer former evicted tenants the right of first refusal to reoccupy the property SB 1439 Page 3 pursuant to a reinstituted rental agreement where the tenant has advised the owner of this entitlement within 30 days of the tenant's eviction from the premises when the property was first withdrawn. a) If the property is returned to the rental market within 10 years from the date of withdrawal, the owner must first offer the returned unit to the tenant displaced by the withdrawal where the tenant has requested the offer within 30 days after the owner had notified the public entity of an intention to offer the property again for rent. (Government Code Section 7060.2) 1)Provides that in rent controlled jurisdictions, the rent control ordinance may specify that if a landlord opts to remove rental housing from the rental market, the landlord must give tenants 120 days' notice before terminating the tenancy and in the case of tenants that are disabled or over 62 this notice must be one year. (Government Code Section 7060.4) FISCAL EFFECT : None. COMMENTS : The purpose of this bill: According to the author, "Speculators are exploiting a loop hole in the Ellis Act that allows them to buy a building and then immediately 'exit' the rental business through wholesale evictions of low and middle income tenants. Families, seniors and the disabled are losing their long-term homes. Ellis Act evictions have tripled in San Francisco in the last year. More than 300 units were taken off the rental market?Fifty percent of the evictions in 2013 were done by owners who had owned the property for less than one year before invoking the Act, the majority occurring during the first six months of ownership. SB 1439 would authorize San Francisco to adopt measures to mitigate the negative effects of speculators on the city's stock of affordable housing caused by a surge of Ellis Act evictions." The Ellis Act : In Nash v. City of Santa Monica (1984) 37 Cal.3d 97, the California Supreme Court upheld the power of a city, in the context of a land use ordinance, to require a residential real property owner to obtain a removal permit, under specified criteria, before the owner could demolish his or her rental SB 1439 Page 4 property and cause its removal from the marketplace. SB 505 (Ellis), Chapter 1509, Statutes of 1985, preempted a local government's authority to compel a rental property owner to stay in the rental housing business by prohibiting a local government from enacting or implementing any law to compel a residential real property owner to offer, or continue to offer, the property for lease or rent. The Act only applies when an owner seeks to remove all the units within a building or all units on a property with a building containing three or fewer units, from the market and only has real effect in cities or counties with rent control and just cause evictions. The Act authorizes local governments to place restrictions on how property owners can "Ellis" a property and exit the rental property market. An owner can be required to give tenants 120 days' notice that the property is being withdrawn from the rental market and elderly and disabled tenants must receive one year's notice. Owners are required to re-rent a unit, at the rent control amount at the time the unit was withdrawn, if they offer it for rent within five years of filing to withdraw or withdrawing the property. Limited application : This is a district bill. Although 11 cities in the state have rent control, including Los Angles, Santa Monica, San Jose, Oakland, and West Hollywood this bill only applies to the city and county of San Francisco. San Francisco arguably has one of, if not the most, competitive rental markets in the state. The expansion of the technology industry in San Francisco has expanded the demand for homeownership types of housing including condominiums and tenancy-in-common. According to the San Francisco Association of Realtors, the median price for a condominium or tenancy-in-common unit in San Francisco hit $950,000 in January 2014, a 24.6% year-over-year jump, and surpassed the $928,000 median price for single-family homes. Exemption for small property owners: This bill would exempt small property owners from any restriction the city and county of San Francisco could place on rental property owners who have owned their rental property for less than five years from existing the rental market. Property owners who are "natural persons", own no more than two properties, and own no more than four residential units would not be subject to any limitations on "Ellising" their property based on how long they owned the property. "Natural person" is not defined in the bill but could be interpreted to limit the exemption to properties that are SB 1439 Page 5 owned by an individual person. This would not include small properties that are owned by a married couple or a family trust. Setting up a living trust or limited liability corporation (LLC) is relatively easy, inexpensive, and often encouraged to avoid liability and insulate owners. In an effort to capture small property owners that may be made up of multiple family members, or situations where parents have formed a trust to ease inheritance of property, the committee may wish to consider defining natural person(s) to include an exemption for living trusts. The committee may wish to consider whether owning one's own personal residence should be considered in determining his or her status as a small property owner. The committee may wish to make clear that an owner's personal residence should not be counted, as one of the two properties or four rental units, to meet the exemption. Inherited properties : This bill would allow the city and county of San Francisco to require that all owners be "owners of record" of a rental property for five continuous years before seeking to withdraw a property from the rental market. The committee may wish to consider that this could negatively impact a property owner that has owned the property for more than five years as an individual but then forms an LLC or trust and transfers ownership to that new entity. The transfer would trigger a change in the owner of record and could then prevent a property owner who has owed a property for more than five years from withdrawing it from the rental market. In addition, the committee may wish to consider how this would affect children who inherit rental properties in San Francisco. Should they be treated as new owners of record or should they be treated as their parents were if the parents owned the property for more than five years? Arguments in opposition : According to opponents, the exemption for small property owners is too narrow. They contend that the majority of small property owners own their properties through family trusts, partnerships, or corporations for various legal and tax purposes. The exemption would not address this segment of small property owners. Opponents also argue that if SB 1439 becomes law rental property owners may no longer be able to sell a property even if they are losing money every month. They contend that the Ellis Act is used primarily by small property owners with duplexes and Victorians who no longer want to or can SB 1439 Page 6 afford to stay in business. Opponents also argue that there are strong tenant protections in place that local governments can impose on owners who desire to exit the rental market, including relocation assistance to displaced tenants, specific notice periods, and deed restrictions. Opponents argue that SB 1439 would prevent owners and families who own small buildings from being able to move into their own units. While San Francisco does have an owner-move-in law, it is so stringent that the Ellis Act is the only way for an owner or his/her family to move into their building. Under the San Francisco owner-move-in-law, only one owner per building can move in, and owners must own at least twenty-five percent. Arguments in support : According to the sponsor of the bill, Mayor Edwin Lee, "Since emerging from the Great Recession, the City has experienced a dramatic surge in Ellis Act evictions. In the last year, Ellis Act evictions have increased 86%, on top of an 81% increase in 2012. These evictions are not being carried out by long-term property owners, leaving the rental business to retire from being landlords. Instead, a small group of bad actors have become serial evictors, buying tenanted, rent-controlled buildings with the intention of invoking the Ellis Act and reselling a vacated building at a higher price?..San Francisco faces an affordability crisis. Protecting the City's existing rental housing is only part of the effort. The City also needs to build more housing. That is why I put forward an ambitious seven-point plan that will build or preserve 30,000 new or rehabilitated homes in the next six years. Through this effort, an unprecedented amount of market-rate and affordable housing will be built to ensure that working class families can continue to call San Francisco home. My seven-point plan also provides a pathway for property owners to receive fair-market-value for their property while preserving rental housing. Under this program, property owners can sell their rental business to non-profit development corporation." Related Legislation: AB 1537 (Levine) is a district bill. This bill reduces the housing default densities from 30 to 20 for two cities and unincorporated Marin County until 2023. AB 1537 bill passed out of this committee 7-0 and is currently in Senate Transportation and Housing Committee. SB 391 (DeSaulnier) would create a permanent funding source for SB 1439 Page 7 affordable housing in the state through a fee charged on recorded real estate documents, excluding those filed at the time of sale. SB 391 passed out of this committee 4-1 and is currently in Assembly Appropriations Committee. REGISTERED SUPPORT / OPPOSITION : Support City and County of San Francisco, Edwin M. Lee, Mayor (sponsor) Tenants Together (sponsor) Accela Advent Affordable Housing Alliance AFSCME AfterCollege, Inc. Airbnb Airseed Alliance for a Better District 6 Apcera AppMesh Inc. Asian Americans Advancing Justice - Asian Law Caucus Asian Pacific Islander Legal Outreach Asian Southeast Asian Society International Policy Institute Asian Students Promoting Immigrants' Rights through Education (ASPIRE) Automatic Labs Inc. Babelverse, Inc. Bay Area Council Bernal Heights Neighborhood Center Bill Sorro Housing Program Box Brian Webster and Associates Calle 24 Merchants and Neighborhood Association California Alliance for Retired Americans California Association of Code Enforcement Officers California Community Economic Development Association California Labor Federation California Music and Culture Association California Rural Legal Assistance Foundation California State Association of Counties California State Association of Electrical Workers California State Pipe Trades Council Causa Justa::Just Cause SB 1439 Page 8 Causes Central City Democrats Chinatown Community Development Center Chinese Chamber of Commerce Christ Our Redeemer AME Church of Irvine Cloudera Community Housing Partnership Community Tenants Association Couchsurfing Crate Labs, Inc. Credit Karma Crowdtilt Data Elite Deloitte Ecumenical Center for Black Church Studies EchoUser Episcopal Community Services of San Francisco Events by Collette Eviction Defense Collaborative Expedia, Inc. Exygy Eyegroove Fido Labs ForageSF Generator Lab Getable, Inc. Github HandUp PBC Homeownership San Francisco Housing California Housing Rights Committee of San Francisco IB5k iCloud Inside Jawbone Jesse Miranda Center for Hispanic Leadership Keen IO Kite Solutions, Inc. Lit Motors Los Angeles Latino Chamber of Commerce Lower 24th Street, Merchants & Neighbors Association McElroy, Most Reverend Robert W., Auxiliary Bishop of San Francisco Mesosphere Inc. Mission Cultural Center for Latino Arts SB 1439 Page 9 Mission Economic Development Agency Nashville West Studios National Asian American Coalition National Housing Law Project Neighborland Newsle, Inc. Non-Profit Housing Association of Northern California North Beach Tenants Committee North of Market Business Association Optimizely Organizer Path Peers Peerspace PLAE, Inc. Project Homeless Connect QuickPay Residential Builders Association RivalMe Inc. Salesforce San Francisco Board of Supervisors San Francisco Building and Construction Trades Council San Francisco Citizens Initiative for Technology and Innovation (sf.citi) San Francisco Community Land Trust San Francisco Housing Development Corporation San Francisco Immigrant & Legal Education Network San Francisco Interfaith Council San Francisco Labor Council San Francisco Latino Democratic Club Silicon Valley Bank Social Bet, Inc. Splice Vine Square Trade StartUpers State Building and Construction Trades Council St. Anthony Foundation SV ANGEL Tagged Tenant Associations Coalitions of San Francisco Tenderloin Housing Clinic Tennis Round, Inc. The Archdiocese of San Francisco TinyCo TMG Partners SB 1439 Page 10 TRAIL Treasure Island Homeless Development Initiative Twilio Twitter United Farm Workers Urban Counties Caucus WebTalk West Bay Housing Corporation Western Center on Law and Poverty Western States Council of Sheet Metal Workers Xoom Corp. YELP YouBetMe Zackees, Inc. Zynga Private individuals Opposition Apartment Association of Greater Los Angeles, Apartment Association of Orange County Apartment Association, California Southern Cities CalChamber California Apartment Association California Apartment Association (CAA) California Association of Realtors California Building Industry Association (CBIA) Civil Justice Association of California East Bay Rental; Housing Association Individual rental property owners (4) Individual San Francisco Realtors (33) Lingsch Realty Nor Cal Rental Property Association San Diego County Apartment Association San Francisco Apartment Association San Francisco Association of REALTORS Santa Barbara Rental Association The Small Property Owners of San Francisco Institute (SPOSF) Petition (103 signatures) Zacks & Freedman, P.C. Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085 SB 1439 Page 11