elscam

Are Ellis Evictions The New Threat? Beware The Ellis Bluff

There were 12 Ellis evictions reported to the Rent Board in Fiscal Year 1998 (July-June). In the 1999 fiscal year, there were 205 reported Ellis evictions. The bad new is that these evictions have increased by a factor of 17. The good news is that while Ellis evictions may have increased by 16 a month, OMI evictions dropped by 42 a month. Clearly, Ellis evictions bear watching but are not even close to replacing the OMI eviction loophole.
Because of the restrictions on re-renting, Ellis evictions will never fully replace OMI evictions (which were both used to evict tenants with affordable rents and then re-rent the units as well as to evict to convert apartment buildings into "tenancies in common" condos).
But while Ellis is difficult to use to evict and then re-rent, it is now the only way to convert apartment buildings into TIC condos. Even for this purpose, though, the restrictions and problems inherent in invoking the Ellis Act probably means Ellis will never fully replace OMI, even for TICs.
Nonetheless, some of the biggest real estate speculators have begun to utilize Ellis to evict tenants and then sell off the units as condos and tenant groups, Supervisors and the Mayor are looking at various legislative options to curb the use of Ellis for condo conversion purposes.
The Condo Conversion & TIC Fight
The 1979 condo conversion law was supposed to be the solution to the problem of evictions and displacement caused by the conversion of apartments into condo type units. The Feinstein law allowed conversions, but limited them to 200 a year and it put in place many tenant protections, most notably a prohibition on senior evictions, relocation benefits, and provisions to ensure tenants in would be able to buy their own apartments.
It didn't take long for real estate speculators, though, to find a way around the condo conversion law—they created "tenancies in common" via OMI evictions as a way to evict tenants and bypass the condo conversion law. These TICs are merely temporary forms of ownership and once tenants are evicted the buildings are subdivided into condominiums. Over the years, about half of all OMI evictions were for the creation of these TICs.
In 1998, the voters ended the creating of TICs via OMI evictions as Proposition G was overwhelmingly passed. And now that the OMI eviction is no longer available for the creation of TICs, landlords are looking to the Ellis Act to convert apartments into TICs.
There are some disincentives to using Ellis to create TICs, however.
First, the restrictions on re-rental of the units make an Ellis created TIC substantially less valuable than other TICs. While a TIC unit is not likely to be re-rented again, having the option to freely rent it any time is valuable. An Ellis-created-TIC next door to an identical OMI-created-TIC would have a significantly lower resale value because of the Ellis restrictions.
Second, Ellis means evicting all the tenants and converting all the units; many OMI created TICs were partial, with one unit maintained as rental to supplement cash flow. That is not possible via Ellis.
Third, most OMI created TICs were converted unit by unit over 4-6 months. As a buyer was found for each unit, the tenants would be evicted. Meanwhile, other units remained occupied with rental income flowing in. Under Ellis, all of the tenants must be evicted at the same time; as buyers of units move in, the other units remain empty with no rental income coming in, maybe for as long as six or seven months.
Lastly, there's much more risk for the real estate speculators who create TICs. As opposed to selling occupied units and letting the buyers do OMI evictions one by one, the practical way to use Ellis is for the speculator to buy the building and Ellis it before selling off the units. When the real estate market slows, there will be substantial risk as speculators may find themselves with an empty building which they can't re-rent and for which there's no longer any interest in buying the units.
Stopping Ellis TICs Before They Start
That real estate speculators would start using Ellis to create TICs once the OMI loophole was closed did not come as a surprise to tenant activists. Ellis has been around a long time and was always an option to create TICs. OMI evictions, though, were much easier and much preferred.
There is so much money to be made via the conversion of an apartment building into condo-type units that Ellis created TICs are expected to continue to grow—even with all the problems inherent in Ellis. That's why less than a month after Prop G took effect, tenant groups got the city to adopt legislation to curtail Ellis evictions for the purpose of TIC conversions.
The short-lived rental housing conversion law required that landlords obtain a permit before converting any rental units into condo type units. TIC developer John Hickey Brokerage, though, sued over the conversion law and the law was thrown out by Sup. Court Judge David Garcia, on the grounds that the law set up a "roadblock" to Ellis evictions, which the Ellis Act prohibits.
That's not the end, though. Currently, tenant groups are pushing new legislation to reign in TIC condos, this time going right at the heart of the issue—reforming the condo conversion law itself.
When the state passed subdivision legislation enabling cities to regulate condo conversions (and when San Francisco passed its condo law), it was recognized that tenancies in common could be a big loophole. Included in the definition of condos were "community apartments," buildings where landlords had a percentage ownership share coupled with an "exclusive right of occupancy" to one unit. This is exactly what a TIC is. Theoretically, these TICs should have been included in the condo conversion law (and subject to the annual cap plus the tenant protections).
But, a state appeals court ruled some years ago that a TIC is not a :community apartment" unless this "exclusive right of occupancy" is recorded on the deed. Simply by not recording this agreement, TICs remained exempt from the condo law. (All TICs have such "side agreements," as these delineate who "owns" and lives in each apartment.)
The San Francisco legislation being drafted simply requires such side agreements to be recorded on the deed. If the agreement is not recorded, the TIC becomes an illegal subdivision. When it's recorded, the TIC becomes subject to the condo conversion law—meaning just 200 TICs and./or condos a year, no senior evictions, tenants' right to buy their apartments, etc.
This approach should be safe legally, too. Cities have extensive powers to regulate condo conversions, being that such conversions are subdivisions. Nor should the Ellis Act prove a problem as Ellis specifically enables cities to regulate condo conversions following an Ellis eviction.
To further boost this condo conversion approach, a second element is being drafted: outlawing condo conversions following an Ellis Act eviction. Prohibiting condo conversions following Ellis means that Ellis-created TICs will have to remain TICs forever. As noted above, TIC ownership is meant to be temporary until the condo conversion can happen. A TIC is a messy form of ownership as all owners are jointly and severably liable (e.g., if one defaults on her mortgage, they all default) and the resale value of a condo is much higher than a TIC. Never being able to turn an Ellis-created TIC into a condo will be just one more problem inherent in Ellis evictions. This approach is also legally sound under Ellis.
Clearly the political will is there for curbing in TIC condo conversions. Prop G—a referendum on TICs—won overwhelmingly. Likewise, two previous landlord efforts to increase condo conversions have lost at the ballot by well over 2-1. San Franciscans hate condos.
And what may be the death knell for the real estate speculators who love condo conversions is that Ellis forces them to be front and center.
When Lynch Associates, or some other speculator, converted apartments with OMI evictions their role stayed hidden. The speculators made all the money, but they left the evictions of the tenants to the buyers of the individual apartments. These buyers were far more sympathetic than the speculators and the media and politicians often saw the conversions as fights between tenants and first time home buyers.
With Ellis, the mask is off. The real estate speculators are now the ones doing the evictions. Worse, they have to evict all the tenants at once. And especially bad, now the people doing the evicting make no claim that they want to live there or that a family member wants to live there. Their reason for evicting is plain and simple—they want to sell the empty units as condo units. In other words, they're now upfront about it: they're evicting to make money. Lastly, in their greed to sell the units, they're plastering the newspapers now with ads proclaiming "DELIVERED VACANT!" which so clearly describes evictions for gentrification.