Tuesday, May 15, 2007

Sheila Kuehl Redefines the Ellis Act

The Ellis Act, California Government Code Sections 7060-7060.7 reads, in part as follows:
No public entity...shall, by statute, ordinance, or regulation, or by administrative action implementing any statute, ordinance or regulation, compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease...
In other words, if you don't want to be in the business of renting property, the government can't force you to continue being a landlord. On the face of it, this seems reasonable. I would not want Sacramento telling me that I had to keep my job as a cement installer or a Macy's saleswoman or a Starbuck's barrista because people in our fine State need to walk on sidewalks, buy clothes and drink coffee.

But this being real estate, there is of course a minor hysteria going on around the language of this law. If you own a TIC you know that a significant number (though not all) TIC properties were formerly rentals. The owners, in some cases, removed the units from the rental market by exercising the Ellis Act, and then repackaged them at TICs for sale. From a financial perspective, this makes sense. With the significant restrictions on rents and laws that govern how they must maintain their properties, landlords have diminishing incentives to stay in the tenant business. Would you rather rent four one bedroom units for $1200 a month each, and get phone calls in the night about broken toilets, or sell four one bedroom TICS, walk away with $2 million and go retire in Guadalejara? One positive consequence of this situation is that more home ownership opportunities are created for middle class professionals in cities like San Francisco and LA. But clearly the main driver here is simple business math.

Some legislators feel that speculators have been buying apartment buildings, flipping properties and exploiting the Ellis Act. Sheila Kuehl has introduced an amendment to the Act that would require five years of ownership before the Act could be exercised. While her intentions may be honorable (protect the infirm and the elderly) this approach is misguided. If Sacramento wants more landlords to stay in the rental business, Sacramento should consider offering more incentives for them to do so. If Sacramento wants to ensure that our weaker citizens have fairly priced and adequate private market housing, Sacramento should think creatively about to encourage that kind of business. Sacramento should not require that people in the real estate business solely bear the cost of a burden - caring for our old and infirm - that belongs to the greater society. There must be a better way, which allows business sufficient freedom to seek profit and offers our weaker citizens adequate protection. But I guess that level of thoughtful consideration is more than we can expect from publicity seeking political crusaders.

57-59 Octavia

The flats in this seven unit circa-1900 Edwardian building are expansive, with three bedrooms and two baths. It is hard to find so much space in Hayes Valley for the price. (Note, with seven residential units this building cannot enter the condo lottery under current law.)

Downsides? No parking. The seller is offering a one year lease with purchase, but your space will be on the other side of Market Street - quite a trek. And after that? The realtor suggests putting in a garage. Given the age and location of the building that would seem to me to be a rather large undertaking. If it was easy enough and made financial sense, wouldn't the owner have added parking before going out to sale?

Also, this building does not have double-paned windows. (The seller has applied some kind of noise deflecting film on the existing glass, but when I went to the open house I found the traffic roar was only slightly diminished.) "The new Octavia Boulevard promenade," as it is described in the flyer, is a heavily trafficked freeway ramp. Perhaps they can offer each partner a Costco-sized box of earplugs at the closing.

Finally, I would take special care to inspect the electrical and plumbing systems of this building. How much voltage is going into each unit? What kind of wiring exists throughout the structure? Due to the age of the place, most of the plumbing will likely be on the outside of the building. How old are the pipes? Is it a mix of copper and other metals?

Any building this old is going to be a challenge at times to maintain. If you are thinking of buying into this TIC, be sure the partners are all good-natured realists who love old architecture and are ready to be patient when fuses blow and drain pipes come undone.

Fractional Loan Application In Progress

Catching up with my building partners after my vacation, I have been told that our fractional loan applications with Sterling Bank are being reviewed by the underwriter. We should find out within a week if we have been approved. One of our six partners decided a few years ago to make a career change. So for the past three years he has been in school full-time, while his domestic partner has helped pay his mortgage. Of course, even though in nearly seven years no one in my group has ever been late with a payment, from the bank's perspective this makes for a bumpier road to closing the new loans.

This raises a few questions that any existing or prospective TIC owner should consider. How might your group manage when one of your partners goes through this kind of a life change? Any partner who was your financial equal or better at the outset can later make a decision that may negatively impact your group's financing options. You can't have a clause in your TIC agreement that says "don't send your children to private school" or "don't pursue your dream of an alternate career."

Also, for an existing group, there are still dependencies among partners when you are making the transition from a group loan to fractional loans. All the loans must be financed through the same bank, and all your applications move through the process together. What if one partner's application does not make the cut?

Sunny Mexico

I have just returned from a horseback riding adventure in the rustic hills about two hours north of Mexico City. San Francisco sure seems chilly after you have spent seven days basking in the high desert sun.

Annual property taxes on a $500,000 hacienda are about $400 a year! No wonder American retirees are flocking south of the border. And what does $500,000 buy you? In one of the colonial city locations most favored by Americans, where the amenities of American-style living are relatively easy to come by, you get "an incredible four-bedroom home with a swimming pool and a separate casita. All of the bedrooms and living areas have a private entrance to walk onto the lovely central courtyard/loggia and pool."