Surreal Estate

The Laws of Unintended Consequence

written by Justin A. Goodman

In this columnist’s opinion, we can find ways to expand outreach, increase community involvement, and (ultimately) win districts, so that we have a seat at the Supervisor table.

The COVID-19 pandemic has many lessons to teach, and it’s been a case study in how legislation responds to life. As cases begin to rise again this winter, I’m reminded of our city’s brisk and severe response last spring. Those steps kept us safer, but they left many unable to earn a living. San Francisco lawmakers quickly anticipated and reacted to the impact on housing budgets, as our unemployment rate skyrocketed.

Initially, the Mayor suspended evictions, month after month (after month after month). The Board of Supervisors moved next, latching on to Governor Newsom’s expanded authority to prevent evictions for nonpayment of rent (keyed to his executive order N-28-20), though not quite in the way he’d envisioned. His executive order merely delayed them, while the local one forever eliminated the ability to evict for rent defaults during that period.

As an afterthought concession to landlords, the city also passed the “Rent Resolution and Relief Fund,” which would provide qualified landlords with grants to cover some of the waived rent. The actual “funding” is discretionary, but don’t worry—the city will also accept private donations. (Seriously.)

Of course, this all feels unbalanced (particularly to a readership of real estate professionals), but there’s logic to it. Our real estate holds significant wealth, and our state and local governments have leveraged it over the years to provide boons to tenants to balance equities. Current law actually liquidates it, avoiding tenant displacement by eliminating rental income altogether. But in a sense, this is just an extreme version of a decades-old legislative approach to problem solving.

The quintessential example is rent control. In the spring of 1979, the city found housing prices at “crisis levels” and rushed to freeze rents to address a shortage of decent, safe, and sanitary housing, resulting in a “critically low vacancy rate.” Our legislators saw rental property as an asset they could leverage to solve small-scale problems with broad-based regulations, by placing systemic burdens on housing providers. Our rent ordinance was born.

Two things are noteworthy here: First, rents in the fall of ’79 were still yesterday’s “market rate” (they just wouldn’t continue to climb if the market did), and second, the market definitely was going to climb because the city just eliminated the mitigating effect of supply on demand increases. To put it another way, tenants could control the cost of their housing by simply staying put, but housing supply would no longer adjust to others’ needs as it used to. The city paid for housing stability for some with the market-backed expectation of others.

As time went on, tension built between existing, below-market tenants and new tenants, and between newly constructed housing and the pre-1979 stock that was already regulated. In the mid-1990s, San Francisco was once again poised to solve an immediate housing problem with a long-term regulation—something called “vacancy control”: rents would stay still even if the tenant vacated.

Local policies led to unintended consequences. Sacramento reacted to the spread of vacancy control in California: this strict rent control deterred new housing construction and encouraged the conversion of rental housing to owner-occupied housing. The Costa-Hawkins Rental Housing Act ended vacancy control, exempted “new construction” from rent control, and prevented San Francisco from redefining “new construction” as anything built later than 1979.

Problem solved or more unintended consequences? San Francisco now had a baked-in incentive to prevent rent-controlled rental rates from resetting (upon vacancy) or to allow the construction of market rate housing units (especially if a rent-controlled unit was demolished). These policies have kept many San Franciscans in the city, but taken to extremes, they frustrate the purpose of the Rent Ordinance.

For instance, the point of the Rent Ordinance was to increase the supply of decent, safe, and sanitary housing. But buildings are depreciating assets—they fall apart over time. They can be rebuilt, with a new useful life, but local policies discourage demolition. They can be updated, but local policies encourage tenants to remain indefinitely. (Two infamous 2015 judicial decisions even allow tenants to pass rent control onto their kids in some cases.)

The Rent Ordinance understandably inhibits evictions, but it also scrutinizes temporary displacement for the purpose of renovations. (Tenant groups are allowed to seek discretionary review on permit applications and use this procedure to stymie what they refer to as “renovictions.”) Rental property is typically updated when it’s vacant, but this regime is designed to prevent vacancy, and so the quality of rental housing declines. Landlords’ liability increases over time, as tenants housing conditions decline through inevitable wear and tear. Hardly the promise of the Rent Ordinance. 

San Francisco fares no better with quantity than with quality. In 1999, the Leno Amendment added to the definition of “housing service” the right to have a specific number of occupants. (After all, if a landlord could evict for subletting, then a departing co-tenant effected a de facto rent increase.) And in 2015, the Jane Kim Amendment expanded the occupancy limit based on the number of bedrooms/living area. But nothing requires a master tenant to add roommates, and master tenants may reserve the right to evict without just cause.

Therefore, in some cases, where the surviving master tenant wants to live alone or no longer needs roommates to afford rent, he may simply move them out instead of downsizing his housing; the rent for a three-bedroom set in the 1990s is less expensive than the vacant studio up the street. And this is certainly our hypothetical tenant’s decision to make, but his economic incentive to maintain a larger amount of housing than he needs is not meeting the goal of expanding the quantity of affordable housing.

Overall, San Francisco achieves its tentpole housing goal: Tenants have an economic incentive to stay longer, so rental rates will trend more “affordable” over time. There are even specialized protections to prevent surgical vacancy decontrol. An owner may move into their own property, but this “just cause” will be scrutinized if their “dominant motive” was to vacate the lowest-paying unit. Tenants of a certain age are “protected,” and it’s unlawful to refuse to rent to elderly tenants who will acquire these rights sooner.

Of course, this creates an incentive for landlords to rent to classes of tenants who don’t plan on staying. Refusing to rent to a family or a senior is housing discrimination. But entering master-tenant leases for corporate housing or “tech hostiles” is a business model. And who could blame the owner of an apartment near a campus from renting to a group of college kids? (They’ll destroy the place, but at least you can fix it when you get it back in four years.)

Regardless of the type of tenant, San Francisco now fiercely defends their occupancy. The No Eviction Without Representation Act of 2018 (Prop. F) created a multi-million-dollar, annual budget to provide free, full-scope representation to tenants facing evictions. Its policy goals are noble: low income tenants shouldn’t lose their affordable housing because they lacked the resources to put up a fair fight.

But these days, San Francisco effectively delegates to landlords the task of enforcing its health and safety laws. Our regulations place a high burden on these landlords, and Prop. F attorneys embolden even the offending tenants to make the “summary” eviction procedure difficult and expensive. (An ironic anecdote from a colleague: he represents non-profit landlords who employ city funding to subsidize low income tenants. When they need to evict a disruptive one, Prop. F-funded attorneys step up to defend, and the city’s budget is fighting itself in a landlord-tenant proxy war.) San Francisco should defend its vulnerable tenants from unbalanced eviction litigation. But Prop. F sometimes ignores the effect of its clients’ behavior on the other tenants next door. Its laser focus blinds its broader policy.

If San Francisco thinks it’s so easy, why doesn’t it buy its own rental housing, you ask? Here you go: The Community Opportunity to Purchase Act (COPA) steps in when a landlord wants to sell a multi-unit rental property. A qualified non-profit gets “right of first offer” and “right of last refusal.” COPA enables the city’s Small Sites Program to intervene where properties, whose value is depressed by long-term tenants, might otherwise become targets for displacement (e.g., for owner-occupancy via the Ellis Act).

But, you ask, how can COPA compete in the open market? COPA-qualified non-profits receive boons from the city, including unique financing, the ability to force over-crowded tenants into a larger unit, or an “over-housed” tenant (with extra bedrooms) into a smaller unit. And … Means testing! COPA tenants have to pay based on household gross monthly income—they no longer benefit from rent control. The needs of the tenants are balanced with the needs of the COPA housing providers.

San Francisco’s never going to means test its tenants, but our policymakers understand that their regulations have made the private market unbalanced and unsustainable. The city exalts the concept of rent control over the experiences of tenants, pits old against new, and positions housing providers against opportunities to promote better housing. This does not achieve the stated goal of the Rent Ordinance.

SFAA has led the way in court challenges to city ordinances, including a recent victory over an intrusive amendment to the buyout ordinance. SFAA was right on the law, but the Board of Supervisors passed that amendment unanimously, well aware of its legal infirmities. Can we do better than run interference? Maybe. Another lesson of the pandemic is that political engagement matters. In this writer’s humble (if optimistic) opinion, our industry members may find ways to expand outreach, increase community involvement, and (ultimately) win districts, so that we have a seat at the Supervisor table. The effects won’t be obvious tomorrow . . . but neither were the effects of the Rent Ordinance.

Justin A. Goodman is an attorney at Zacks, Freedman & Patterson.