Mighty Small

In the Legal Loop

written by Kilby Stenkamp

With new laws potentially shifting
our rental market, your property value depends on staying informed.

On December 20, 2019 a new ordinance was signed off on by Mayor London Breed “thereby amending the Administrative Code to apply eviction controls to units that are exempt from rent increase limitations because they first received a certificate of occupancy after June 13, 1979, or have undergone a substantial rehabilitation; clarifying the law’s application to units with pending notices to vacate; extending the City’s current residential rental unit fee to these units; making non-substantive, technical changes; and making findings as required by the Tenant Protection Act of 2019.”

In other words, units that were formerly exempt from the San Francisco Rent Ordinance due to construction after 1979 are now subject to eviction control. The new ordinance was effective January 19, 2020. This new ordinance slipped in during the holidays and does not appear to have been on anyone’s radar, however many predicted this was coming.

Being in the landlord business has become more challenging than ever with the statewide AB 1482 ordinance (or the Tenant Protection Act of 2019), which caps annual rent and requires just cause eviction. If there ever was a time to become informed, it’s now. This is a game changer. Join local and statewide apartment associations, attend classes, or consult with a qualified landlord-tenant attorney. Understanding the nuances of the new laws and what you can and can’t do is crucial. Your property value depends on it.

Many economists agree that rent control actually doesn’t protect renters, but instead has the opposite effect, driving rents and values upward. These new laws are a Band-Aid approach to the bigger issue. We need a comprehensive solution that will create new housing units and a plan for the growing homeless population.

Ashley Klein at KDV Law is always a wealth of information; she works with landlords and their array of issues on a daily basis. She predicts that San Francisco’s pre-1979 housing stock will likely go up in value, while post-1979 housing may soften in value. She was quick to point out that there are landlords out there with long-term tenants, particularly with 2-4-unit properties, who cannot afford to maintain their property. Several years ago, I visited a 4-unit property in Potrero Hill where all the tenants had been there forty-plus years, and they weren’t going anywhere, at least for the next twenty years. The income was comparatively minimal, and the landlord couldn’t afford improvements, let alone a new roof. Rent control has limited the landlord’s ability to increase revenue, and as a result the property has suffered all the way around. If you’re in a situation like this, reach out to Ashley or another qualified local landlord attorney and find out what your options are. In the long run, the time and cost of an hour consultation are nothing compared to the potential in upside in income and/or property value.

During my travels, I’ve met a number of small property owners who don’t like to raise rent. They don’t want to deal with vacancy, remodels, repairs, confrontation, etc. With the new state and local laws in place, this style of management is a thing of the past. AB 1482 caps annual rent increases at 5% plus the rate of inflation and requires landlords to show “just cause” to evict a tenant who’s been in place over a year. It is imperative that you take your yearly rent increases and not hold out for banked rent increases. Even if the Rent Board banked increases exceed 5% plus inflation, you’re capped with the new statewide law, which supersedes local law.

Landlords who don’t raise rents often do so to avoid tenant complaints or they fear increased maintenance requests. If you take the Rent Board’s annual increase raise every year, it becomes habit and the tenants expect it. The annual allowable increase is based on 60% of the increase in the Consumer Price Index for all urban consumers in the Bay area. Theoretically, your costs to operate a property go up and so does a tenant’s income. It’s great when tenants report maintenance issues—if something is broken, it needs to be fixed. Often, maintenance that goes unreported costs more to fix in the long run. Be a pro-active landlord and get into your units yearly to check smoke and CO2 detectors, which also gives you the opportunity to look for unreported maintenance issues. With the new laws and current rental market, it’s unlikely that your tenants will move out over a rent increase. If they do move out, get in and make some simple cost-effective upgrades that will pay for themselves with the new market rent. The value of a 2-4-unit property is often determined by a gross rent multiplier (GRM), staying on top of rent increases and income should be a priority.

Most of San Francisco’s 2-4-unit housing stock was built in the Victorian and Edwardian era. For the most part, these properties have the perfect qualities that represent quintessential San Francisco. The Planning Department has been putting out a very detailed annual survey (since 1967) of local housing production trends. Lately, the trend has been toward increasingly larger buildings, which makes sense from a developer’s perspective. The more units you build, the lower the cost per door and the better the return.

Per the Planning Department’s most recent report, 2-4-unit construction comprises a very small percentage of new construction in the city. In addition, over the past 25 years, TIC conversions to condos has further reduced the inventory of 2-4-unit properties. For the savvy buyer, 2-4-unit properties are a bang for the buck. On a quick Multiple Listing search on sales from January 1 to January 31, I found single family homes and condos are selling around $1,000/square foot, while 2-4-unit properties are sold on average at $745/square foot.

Even with the new local and statewide laws in place, if managed correctly, the potential for upside in a 2-4-unit property can be significant. As an owner-user a 2-4-unit property can be an ideal investment. There are also opportunities for seasoned and entry level investors. As always, not all 2-4-unit properties are created equally; buyers need to make an informed decision before making a purchase. Thoroughly review disclosures, have inspections when possible, and consult with a local landlord-attorney for advice.

I’m pleased to report that sales in the 2-4-unit sector show an increase in price per square foot over the same period year-over-year. For the purpose of this article, I ran a Multiple Listing report for the last six months in districts 1-10 for all 2-4-unit sales, including mixed use. Then I compared those sales to the previous year with the same criteria.  The average price per square foot of 2-4-unit properties over the last six months was approximately $715 and the median sale was $900,000. In comparison, last year, price per square foot was approximately $700 and the median sale was $560,000. The number of properties sold and days on market has remained about the same.

It is difficult to predict the future for 2-4-unit properties with the new state and local laws in place. Now that outlying areas are rent controlled, will investors reconsider San Francisco? My colleague has been investing in the East Bay for years because of San Francisco rent control. He begrudgingly admits that with the new state law, he now has a rent-controlled portfolio. He is rethinking his investment strategy and wonders if others won’t do the same. Our housing market relies heavily on supply and demand. If there are fewer 2-4-unit properties available, will that drive values up? With high housing costs and low interest rates, our 2-4-unit market should remain strong.

Kilby Stenkamp is a realtor at Vanguard Properties. She can be reached at kilby@vanguardsf.com or 415-370-7582.