What If San Francisco Tore Down Rent Control Wall?
Steve MacDonald is the rare lawyer who represents both landlords and tenants in San Francisco’s highly regulated, high-stress, politically charged area of housing law.
He recently gave a speech at the City Club that questioned the effectiveness of San Francisco’s most sacred cow: rent control.
Because MacDonald dared to talk about something no one is allowed to address in San Francisco, we dared to reprint his bold and thought-provoking speech. Why? Because we are interested in policies that actually help the most number of people. If a policy is hurting people, we want to examine it and find out how to fix it. We believe open dialogue is important in a free society and sometimes good ideas can come from unexpected sources — if we’re willing to listen.
Read Steve MacDonald’s speech on rent control:
Introduction
The unofficial title of my presentation is: “Mr. Gorbachev, tear down that wall!” In other words, we will need courageous political leadership at some point to face certain realities and to disassemble a failed political construct.
Nearly 40 years after its creation, our local system of residential rent and eviction control ultimately helps no one. The forces of supply and demand will always control the cost of living in our fair city.
History
Rent control got its start in the early 20th century in New York City. It was also adopted in many places during World War II as part of necessary price controls.
The more modern history is a product of liberal politics in the early 1970s in the Boston area, jumping to the West Coast by the end of that decade.
In Berkeley, Santa Monica and San Francisco a very strict form of control was passed into law. Actually, rent and eviction control go hand in hand. One without the other is ineffective. This is particularly so since our state legislature in the mid-1990s decided that after a tenant vacates a landlord may raise the rent to market rate. It then becomes controlled again.
“Just Cause”
You understand that rent control only allows tiny rent increases each year. But the other component, eviction control, allows the tenant to remain indefinitely, unless the owner has “just cause” to terminate the tenancy. There are sixteen. The first seven are “fault” based, i.e., nonpayment of rent, nuisance, etc. The latter nine are “no fault”, e.g., owner-move-in or Ellis Act. These all come with a host of technical requirements and the latter group requires relocation payments. They also mandate “good faith, lack of ulterior motive” — subjective issues which an expensive jury trial might have to decide.
Legal Challenges
Time and again landlords have challenged these local ordinances, all the way to the California and U.S. Supreme Courts. No full frontal assault has ever succeeded. It is within local government powers to create such consumer price controls. Frequent amendments are a reality as elected officials compete to have their name on a tenant-friendly change to the law. These are sometimes struck down, in whole or in part. There have been over one hundred amendments to our ordinance and a similar amount of changes to the Rent Board’s Rules and Regulations.
Vacancy De-Control
I alluded to vacancy de-control. That means that when a tenant finally vacates, voluntarily or involuntarily, the rent can be raised to market. If the tenant enjoyed protection for a couple of decades or more, the rent could triple or quadruple. If it goes up $2,000 per month the value of the building can go up $200,000 as the rent roll typically determines the value of an investment property.
As you can imagine, in the involuntary displacements there are many battles and considerable legal fees. The events every day down at the Housing Court department of the Superior Court could serve as a ready script source for a long-running serious TV drama such as “Law and Order”(Bill Murray would play my character).
Current Results — 36 Years After Passage
The result of all this, no doubt never considered in 1979 when our Board of Supervisors and Mayor Dianne Feinstein signed this into law, is tremendous tension. The tenant is desperate to maintain possession, the landlord highly motivated to recover it.
Frankly, I submit, and even the Executive Director of the Rent Board has agreed with me, that any tenant now living in a smaller building WILL be evicted, sooner or later, one way or the other. There is a target on their back. Even elderly, low-income, disabled tenants.
Last year’s attempts in Sacramento to diminish or limit the Ellis Act failed. Both our local state senator and assemblyman did everything they could to eliminate this last resort of the landlord. They were defeated.
What Is The Ellis Act?
The Ellis Act is state law and so it trumps local ordinances. It allows a landlord to clear out a building: everyone and anyone. Some relocation money is required. But then the owner cannot re-rent for five years. What are his options? 1. Hold it empty, if he can afford to, and re-rent it five years later for top dollar, or 2. Sell off the apartments as tenancies-in-common, TICs. Not the same as a condo, but almost. Individual financing now available. Very tempting, either way. Owners have profited handsomely. Either the rents go up ten-fold; or the value per unit went from $200,000 to $1,000,000 when sold individually.
Who Benefits?
I am not an economist. But I think that I understand the basics. We have a limited supply of housing on the tip of this peninsula. We have a very steady and strong demand. Rent control results in two distinct tiers of housing prices. I remember when my son, as a young lawyer, moved into the Golden Gateway Center, a several thousand unit apartment complex by the Embarcadero. He told me, as I helped move him in, that I would notice two distinct types of occupants. Older folks, paying $700 per month for their unit, and younger professional types paying several thousand for identical apartments!
So, two levels.
I believe that without rent control artificially deflating one section of the market, a free market would result in the higher rents coming down to the equilibrium. Even now, in the long run, with the death or departure of the tenant, the landlord ultimately gets back to the high market rent, much higher than the equilibrium rent. So, nobody ultimately benefits. It averages out.
In fact, the tenants who have enjoyed reduced rent for many years suffer the most when they get evicted through owner-move-in, the Ellis Act, or even a buyout. They are completely unprepared for the inflated market rent. They benefited for a while, a long while, and then face a severe shock.
Consider this: sometimes I get calls and emails from tenants in Daly City and elsewhere in San Mateo or in Marin County. They tell me their landlord is trouble, retaliating, evicting, etc. And I listen and try to have sympathy. But I have to be frank with them. What is there to fight about? Without rent control you can move down the street and get the same level of housing for the same money, right?
Frankly, the Ellis Act opens up many opportunities for middle class folks to buy their home. A tenancy-in-common (TIC) apartment is considerably less costly than a condo.
When the “evil” landlord Ellises a ten-unit building, making a very tidy profit, he also allows ten people, or couples, or families to own their home in San Francisco. If it got done, or if condo conversion was allowed, on a larger scale prices would come down, given the larger supply.
How Landlords May Prosper
- Know the law, at least the basics.
- Belong to SFAA or SPOSF, the landlord guilds, sources of education.
- Think before you speak or consult a knowledgeable attorney whenever even a minor dispute erupts.
- Have great insurance. Landlords and their insurance companies probably pay out $100 million in wrongful eviction claims and related matters here in San Francisco every year.
- Know when you are legitimately entitled to a market rent increase, i.e., when the last original roommate has departed. Understand when you have “just cause” for eviction, either fault-based or no-fault.
- And yes, if you have a building whose rents are a fraction of market consider cashing in by selling an empty building as TIC homes for first-time homeowners. If you don’t the next owner of the building will probably figure out that is how to maximize the value.
How Tenants May Survive
Tenants can best survive in the current system by renting in a building constructed before 1979, and thus rent controlled. They should live in a complex as large as possible so that it is unlikely that they will ever face an owner-move-in eviction. Similarly, up to this point, owners are reluctant to Ellis Act, i.e., empty out, a very large building due to their limited options afterwards. However, that may change, and it already is. Witness the Park Lane building, some thirty-three rent-controlled Nob Hill luxury apartments were all emptied out last year and sold as high-end TICs. And, of course, tenants must behave themselves, not giving an opportunistic landlord any ideas about a fault-based eviction.
The Future: Peaceful Disassembly
When the total dysfunction of this present regulatory regime becomes painfully apparent to a growing proportion of the electorate I suspect that some of our very capable local elected officials, Scott Wiener and David Chiu come to mind, will take the necessary leadership on the issue in future years or decades.
Probably they could support amending the ordinance to deregulate units, permanently, when they become vacant. Protections will remain for those tenants already in place. Our society can always, as it has, allow for public funding of housing for those in need, elderly, disabled, low income. The result will be a gradual return to a free market, and an equilibrium resulting in deflating rents for some units, and higher rents for the newly decontrolled units.
It may also save the public a hundred million dollars per year in legal fees, and the insurance companies and those paying policy premiums another hundred million dollars annually (I base these figures on amounts I witness cycling through my firm and what my market share is).
There won’t be any more buildings being kept vacant for five years, either.
Will our City lack diversity, economically and otherwise? It may. And I do not consider that desirable. But, again, I don’t think we can fight the law of supply and demand. Perhaps improved mass transit will ameliorate that, allowing folks to commute easier.
Political Will & Leadership
Currently, more so than ever, elected officials, particularly when seeking re-election or higher office, are falling over each other to be seen as more pro-tenant than their competitor.
Witness the last election when the “two Davids”, Campos and Chiu, both members of the Board of Supervisors, both Harvard Law grads and liberal Democrats, sharing a 98% identical voting record, had to tar each other claiming one was more concerned with tenant rights than the other. David Chiu made the mistake of allowing me to host a fundraiser for him only to be met by loud protesters outside John’s Grill since I represent landlords (even though I represent tenants, too).
It was Marisa Lagos who exposed this silliness the next morning on page one of The Chronicle. She pointed out how false this was, how desperately they were trying to make some distinction and how meaningless it would be for their electorate once the chosen Assemblyperson reached Sacramento (It’s nice to have such a thoughtful, serious journalist in our midst).
Conclusion
I am not comparing rent control to the Soviet Union. Not at all. In fact, my personal politics may be the most liberal in this room. I am just saying that it took a man like Gorbachev, a man of the century, really, to have the intellectual integrity and leadership needed to admit when something is not working. Even something sacred.
We will need that, too, some day.
MacDonald is the founder of Steven Adair MacDonald and Partners, P.C. and is a native of New York who hitch-hiked to San Francisco in 1969. MacDonald became interested in the law while serving as a draftee in the U.S. Army and was able to finish college and law school on the G.I. Bill.
