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Los Angeles Business Journal

Monday March 17, 2014

Landlords Want to Toss Eviction Bill
POLITICS: Proposal would limit owners' ability to sell properties.

By Howard Fine
 

EDITOR'S NOTE: This story has been corrected from the print version. An initiative is not among the options being considered by the tenants' rights organization Coalition for Economic Survival if a state bill passes to limit evictions under the Ellis Act.

The value of his rental properties took a hit during the real estate downturn. And now that the market is on the upswing, Earle Vaughan fears a new bill in Sacramento could send them sliding back down.

Vaughan owns seven small apartment buildings in the city of Los Angeles. He's concerned that the proposed bill would make it almost impossible for apartment building owners to evict tenants in order to sell their properties. That could discourage potential buyers and push down sale prices.

"This bill would unquestionably lower the price of my properties," Vaughan said.

He is one of scores of local landlords fighting the bill. Two local landlord associations – the Apartment Association of Greater Los Angeles and the L.A. division of the California Apartment Association – also oppose the bill. They all claim the bill, AB 2045, would place nearly insurmountable obstacles before landlords wishing to sell their properties.

Under a state law called the Ellis Act, landlords in rent-controlled cities are allowed to evict tenants in order to sell their properties or convert them to condos as long as they give sufficient notice and pay moving expenses. Landlords are also granted speedy hearings. The proposed bill would allow local governments to place moratoriums on such evictions. Rent-control laws have been in force in Los Angeles, Santa Monica and West Hollywood since the 1980s, making it sometimes tough for landlords to take care of their aging buildings.

"In some rent-controlled cities, the Ellis Act is the only way owners can say enough is enough when they are not able to maintain their buildings," said Beverly Kenworthy, executive director of the California Apartment Association's L.A. division.

The Ellis Act, adopted in 1985, gives landlords who wish to sell or convert their properties the right to evict tenants without just cause, as long as they provide at least four months notice and pay relocation fees of up to $20,000 per tenant. After the four months, landlords can use an expedited legal process to evict tenants who have refused to leave. Tenants with disabilities or over the age of 62 must be given a year's notice before eviction proceedings can start.

(Neither the Ellis Act nor rent-control laws limit the ability of a landlord to evict a tenant for "just cause," such as failure to pay rent, conducting illegal activity on the premises or posing an imminent harm to other tenants.)

The bill, by Assemblyman Tom Ammiano, D-San Francisco, is the latest effort to limit the Ellis Act; almost all previous bills have failed in past years. It would allow local jurisdictions – counties for now, but likely upon amendment to include cities – to place moratoriums on Ellis Act evictions.

The bill also would eliminate the expedited legal process for Ellis Act evictions, instead placing the evictions on civil court calendars. After budget cuts earlier this decade, delays have increased in civil courts, with some cases taking up to two years to be heard.

Ammiano said he introduced the bill in an attempt to stem the rush of condo conversions taking place in his San Francisco district, where rent controls are in effect. Housing prices in that city have skyrocketed in recent years amid the Silicon Valley tech boom, prompting apartment landlords to rush to sell or convert the units to more lucrative condos; last year alone more than 300 rental properties were taken off the market. As a result, thousands of tenants have been forced out of their units, with hundreds facing formal Ellis Act eviction proceedings.

In a statement last week to the Business Journal, Ammiano said he sees the problem statewide, too.

"While Ellis Act evictions are rampant in my district, it's clear that they are also hurting other California jurisdictions that have attempted to protect tenants' rights with rent-control measures," Ammiano said in the statement.

"Southern California activists have identified hundreds of Ellis evictions in recent years," he said. "I want to make sure that all communities covered under the Ellis Act have a way to protect affordable housing and the tenants who live there."

Larry Gross, executive director of L.A. tenant rights organization Coalition for Economic Survival, said that in the past three years, more than 1,000 rent-controlled units have been taken off the market in Los Angeles, with many of those going through the Ellis Act eviction process. He expects the pace of such evictions to increase as housing pressures mount, particularly on L.A.'s Westside.

"We have a tidal wave of Ellis Act evictions on the horizon," Gross said. "What's happening now in San Francisco will soon happen here, unless action is taken. We need this legislation now, not after the fact, because once we lose those rent-controlled units, we will never get them back."

In Los Angeles, there are roughly 634,000 rent-controlled units in buildings built prior to 1978. In Santa Monica, there are about 28,000 rent-controlled units and 15,000 in West Hollywood.

Control system

All three cities use a type of rent control called "vacancy decontrol": When a unit is occupied, annual rent increases are capped. But when the tenant moves out, the landlord can sign up a new tenant at the current market rate. In Los Angeles, the maximum annual increase allowed for the 2013-14 fiscal year is 3 percent; that figure has stayed relatively constant over the years. In Santa Monica and West Hollywood, the maximum increases are much lower: 1 percent and 0.75 percent, respectively. The three cities use different formulas tied to the Consumer Price Index.

In any of these cities, a tenant who remains in his or her unit for more than 20 years will likely be paying less than half the current market rate for rent. So a longtime tenant in a rent-controlled building in West Los Angeles might be paying $1,000 a month for a one-bedroom apartment, while an equivalent unit in a newer, non-rent-controlled building next door might rent for $2,200 a month.

With such disparities building up over time, there is tremendous financial incentive for landlords to try to push out longtime tenants. For this reason, each city places strict controls on when and how tenants can be evicted.

Low ROI

Landlords generally have fairly low rates of return on their apartment investments to begin with: In Los Angeles, the return averages between 2 percent and 4 percent. For rent-controlled buildings, the return is closer to 2 percent.

But, landlord Vaughan said, that's not always the case.

"Sometimes an owner is willing to accept a lower rate of return in a non-rent-controlled building because they know they will be able to pass on increases in maintenance and utility costs to the tenants. In rent-controlled buildings, they sometimes want more of a cushion to absorb those costs, since they cannot all be passed on to tenants," he said. So landlords are incentivized to boost the rent as high as possible when a new tenant moves into a rent-controlled unit.

Vaughan added that the biggest cost factor for landlords in rent-controlled buildings is often not maintenance but rising water and sewer bills, especially from the Los Angeles Department of Water & Power. Landlords are required to pay those bills for the tenants.

If Ammiano's bill passes and includes cities, Gross said his group will push for Los Angeles to enact a moratorium on Ellis Act evictions. Because more than 60 percent of city residents are renters, a moratorium would stand a good chance of being upheld by voters should apartment landlords challenge it.

That's one reason why landlords and rental owner groups are pushing hard to stop Ammiano's bill in the state Legislature.

"We're going to try to fight this bill at the state level," said apartment building owner Vaughan, a past president of the Apartment Association of Greater Los Angeles. "We don't want it to get to the council level, we don't want to take the chance given the politics here. There are a lot of renters who vote."

Other local apartment building owners said this bill would severely limit future options.

Irma Vargas, who owns three apartment buildings in Los Angeles, said her maintenance bills are increasing faster than revenue from rents. She's near retirement and if this bill passes, it would make it much harder for her children to deal with the properties.

"It's definitely getting more costly to maintain as those properties age," she said. "If it gets to the point where the properties need to sell, my children would be the ones saddled with these restrictions. It likely means we not get as much money as we would like and it would take years to sell the buildings."


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