The court system offers no shortages of material for this column. Working together with the more than 200,000 members of California's State Bar, California appellate courts supply a steady stream of decisions related to the sale, ownership, and use of real estate. Even more accommodating than the courts, though, is the state legislature. There is no end to the ideas put forward in both houses that would have an impact on the real estate business and real estate ownership.
Today's topic comes to us courtesy of state Senator Sheila Kuehl, representing the People's Republic of Santa Monica and outlying communities. Ms. Kuehl offers us SB 464, a bill whose purported intent is to preserve (certainly not create) low cost rental housing stock. The bill would accomplish this in the following way: Owners of rental units in jurisdictions having rent control would be prohibited from going out of the rental business unless they had owned their property for at least five years.
Imagine this scenario: The Elders, just a couple of years away from retirement, decide that they would like to spend their golden years near the ocean, in a city like Santa Monica or San Francisco. So they make a financial move similar to one made by thousands of others in comparable circumstances. They sell (technically, exchange) their rental property in Fresno and use the equity to purchase a rental unit in the beach city of their choice. It doesn't really bother them that the city has rent control, because they will only rent the property out for a couple of years. Then they will sell their long-time residence, and move into the beach property. Unless SB 464 comes into effect. Were that to be the case, the Elders would have to hold that rental property as a rental for five full years, before they could move into it.
I'm not making this up. I know this is America. But that is what the bill proposes. Moreover, its proponents say it will stand up in court. To those of us living in the jurisdiction of the 9th Circuit Federal Court of Appeals, a large bet against them would seem unwise.
A bit of background. A couple of decades ago, the California Supreme Court upheld the power of a city to require a residential landlord to obtain a removal permit under specified criteria before he or she could remove a rental property from the marketplace. In response to that decision, SB 505, the Ellis Act, was adopted in 1985. The Ellis Act preempted the ability of local governments to adopt an ordinance that would prohibit rental property owners from removing a property from the marketplace. So, under existing law, if you can imagine, a California landlord is actually allowed to go out of the rental business if he or she chooses to do so. Subject, of course, to certain requirements.
But this, according to the proponents of SB 464 has created a problem.
The Western Center on Law and Poverty states: "In Los Angeles, more than 12,000 rental units have been 'Ellised' in the last five years. The loss … has been devastating to the tenants evicted and to the city's rapidly-declining affordable housing stock." Moreover, the Center declares, similar activity has been occurring in both San Diego and San Francisco.
Their analysis continues: "The problem is not long-term landlords, but buyers of older (and therefore less expensive) buildings, who have no intention of continuing to rent the buildings." These buyers, it is said, "Ellis" the buildings, demolish them, and then build expensive condominiums. "In the last 2 years, fully 46 percent of the 'Ellised' buildings in Los Angeles were 'Ellised' less than a year after purchase. Another 19 percent were 'Ellised' 1 to 2 years after purchase."
I would be the last to deny that California has a problem when it comes to affordable housing -- a problem for renters as well as would-be owners. Nor do I lack sympathy for those who suffer the effects of that problem. But it's fair to wonder if SB 464 proposes a viable, not to mention just, solution. Perhaps, just perhaps, even better results could be accomplished if our lawmakers would apply equal diligence to finding ways to lower the costs of construction by simplifying the permitting process, reducing and removing outlandish fees, and granting zoning concessions to providers of low cost housing.
Californians who have opinions about SB 464 certainly ought to let their elected representatives know about it. And those outside of California? Beware -- the political winds often blow from west to east.
