News & Opinion from BPOA
Notes from Michael St. John
Very few Berkeley property owners use the Ellis procedure to evict tenants. The process is difficult and expensive. I have heard it said that the new fee schedule (roughly $13,000 per tenancy) makes it unreasonably costly.
I think it is time to reconsider this conclusion.
The gap between the rents long term tenants pay and the rents other tenants pay is growing so large that some owners in some situations may want to consider Ellis evictions as a way of achieving a fair return on their investment.
The Ellis rules prohibit re-renting for five years after an Ellis eviction. But the rules allow re-renting at market rents thereafter.
Consider the case of a fourplex occupied by four long-term tenants paying below-market rents. If the rents average $1,500 when market rents would average $3,000, following the Ellis procedure might make sense.
Thinking of it as a purely financial question, the income from the four units would be $72,000 a year, rising under standard rent control assumptions to $88,000 in ten years and $107,000 in 20 years. Under the Ellis rules, the owner would have to leave the units vacant for five years but could then rent them at market. If the owner followed the Ellis procedure, he would receive zero rent in years 1 through 5, but would then receive $144,000 in year six, $156,000 in year 10 and $190,000 in year 20. The loss during years 1 through 5 would cumulate to $382,185 in year 5, then diminish to 0 in year 10, whereupon his investment would be recouped completely. From then forward, it’s all gain.
In year 6, property value under rent control would be $973,000 vs. $1,728,000 if one followed the Ellis procedure. In year 20, property value would be $1.3 million under rent control vs. $2.3 million under the Ellis procedure. That’s a significant gain, especially considering that the investment is recouped completely by year ten. It’s a long term project, but it might be worth it for some owners.
In addition to the vacancy loss, there are the Ellis fees. Fees to tenants plus legal fees could amount to $75,000, but this amount pales when compared to the potential gain. This is especially so considering that while the units cannot be rented as residences for the first five years, that doesn’t mean that they can’t be used. The owners can live there themselves. The owners can rent the units for commercial purposes consistent with zoning regulations. The owners can allow others (friends, family members, employees) live there rent free.
It is conceivable that the owners would sell tenants in common shares in the property when the units are vacant. New TIC owners could live there. If these owners move elsewhere after five years, those units could then be rented at market. Using a property in these ways during the five years in which the Ellis procedure doesn’t allow residential rental would offset — possibly reverse completely — the Ellis investment cost.
Considering these possibilities, it is clear that the Ellis option may be viable for some owners in some circumstances. I have previously considered the Ellis option the “nuclear option” that should be avoided in most circumstances. I am now seeing that the Ellis option may be a reasonable way to handle the unreasonable gap between rent controlled rents and market rents when all or most of the units at a property are occupied by long term tenants enjoying rents – possibly for their lifetime - that are unreasonably low by today’s market standard.
Michael St. John is a property management consultant who has assisted Berkeley property owners with tenant and rent control problems for 35 years. He can be reached at email@example.com, 707-937-3711, or 510-845-8928.
A recent case illustrates the importance of perspective when issues arise under rent control.
The owners of a single family dwelling in the Berkeley hills, many years ago, added a bathroom and kitchen space to the lower level “bonus room” adjacent to the garage so that they could more conveniently house an au pair who helped care for their children. Later, when the parents were elderly, the lower space housed a caregiver. It was a convenient arrangement for those purposes.
Time passed, the parents relocated to an assisted living facility, and the home was sold. The buyer rented the house to a group of students under one lease, making no distinction between the main house and the lower level. The buyer didn’t register the home with rent control because, like all single family homes, it was exempt under state law.
But after several more years, the Rent Board investigator, discovering that there were two kitchens at the property, decided that the home was a “duplex”. The RSB charged the owner registration fees and penalties going back eight years. The owner wrote to the RSB, explaining that it was a home, not a duplex, second kitchen notwithstanding. The RSB didn’t respond to this letter. Instead, they filed a lawsuit for collection of the fees and penalties.
Terrified, under pressure from the lawsuit, not understanding his rights, seeing that delay would cause the penalties to increase still more, the owner caved in. He paid the fees and penalties for two units. The RSB said that, in addition, he had to register the units by filling out registration statements. So he did, indicating two units, under protest.
Years later, the owner wrote again to the RSB, explaining the situation and requesting that the “duplex” determination be reversed. The RSB held up the registration statement that the owner had signed, under duress, as proof that there were two units there! The best evidence, they said, was the statement the owner himself made, under penalty of perjury, about the number of units at the property!
The people at the RSB don’t understand the power they hold and the fear they cause. They don’t seem to appreciate that the rules surrounding rent control are complex, hard to understand, and worrisome. They seem to think that all owners are what they call “flagrant violators” – enemies of the state who have to be found out, exposed, charged with wrongdoing, and fleeced.
They don’t understand that the penalties they charge are outrageous – that no other agency of government anywhere in our country charges penalties anywhere near as high as the penalties the RSB claims the right to charge. They don’t admit that not once has a court of law upheld the fees that the RSB continues to charge. The RSB sanctimoniously offers a “settlement package” that gives lip service to the statute of limitations on civil penalties, expecting us to be grateful for their forbearance, never admitting that their fee schedules – which they have never repudiated – are themselves illegal.
Again and again when observing the Rent Board, we are reminded that “Power corrupts, and absolute power corrupts absolutely”. The Rent Stabilization Program as it is currently organized is fundamentally undemocratic. Independent of City government, answerable to no one, mired in age-old mythology about “landlords” and “tenants”, the Board and its staff operate a biased, abusive program that divides the community and causes endless upset, to no useful purpose. Hopefully, someday, the citizens of Berkeley will come to their senses and find another way.
Here’s what happened this Fall: Staff, without seeking public input or notifying property owners or the public, drafted amendments to Regulations 524 and 1018 that basically said that tenants who were gaming the system would win, almost always. The amendments revised Regulation 524 and interpreted Costa-Hawkins such that tenants would be able to live elsewhere, essentially forever, and retain their rent discount. The proposed changes prohibited property owners from introducing evidence proving that tenants were living elsewhere.
Staff made up the new interpretation, not present in either Regulation 524 or Costa-Hawkins, that “intent” could be considered. That a tenant intended to live at the Berkeley apartment would be considered as proof that a tenant did live at the Berkeley apartment. Never mind that intent is not mentioned in the rent law or in Costa-Hawkins.