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.