By Colette Thomason, Esq.
Property investors often shy away from purchasing a multi-family building in a city with rent control. Rent control often means low rent which in turn, to a landlord, means low income. At the same time, rent control protects long-term tenants from market value rent and eviction. Between these two competing interests is the Ellis Act: a basis for eviction in a rent control market and a valuable option for property investors in a highly restricted real estate market.
The 1985 Ellis Act is a state law that allows property owners to remove a property from the residential rental market and thereby evict the tenants who live there, under certain conditions and restrictions. A property may be removed from the residential rental market if, for example, an owner or owners move into each unit, even if the owner-occupant owns a minority interest in the property. The property may also be used for family purposes such as having family members move in rent free. Other properties may be converted to commercial use or converted to individual condominiums.
Among the many conditions and restrictions, property owners must notify tenants of the pending eviction 120 days before removing the property from the rental market, with a longer one-year notice period for tenants who are disabled or over age 62. All units must be removed from the market at the same time.
Additional restrictions apply after the property is removed from the residential rental market. No unit may be rented for two years. After two years and up to ten years, if the property owner wants to rent any unit, they must first offer the unit to the evicted tenant at the same price the tenant previously paid, plus the yearly allowable rent-control increases. The tenant pays the rent control rate for the first five years after moving back in, then market rates the following five years. If the displaced tenant does not move back in, then any new tenant also benefits from the former rent-controlled rental rate for five years. This is considered a penalty for landlords who re-enter the rental market within the first five years of evicting the prior tenants.
Rent control supporters claim that many property owners use the Ellis Act as a basis for evictions, but do not follow through with the necessary conditions in order to increase profits. For example, a landlord may conduct an Ellis Act eviction one unit at a time, then later re-rent the units one at a time to evade detection. However, if a landlord violates the Ellis Act, the landlord is liable for the displaced tenant’s actual damages plus punitive damages of up to six months rent and any other remedies available at law.
The Ellis Act is particularly useful, and indeed most commonly used, for three to four unit buildings. These buildings are more easily occupied by owners or family members than a large-unit building. The Ellis Act has been very beneficial to investment groups that include investor owners who wish to occupy the property or have family members occupy the property for at least five years. After five years, the property may be rented at market rates, whether to the former tenant or a new tenant. The Ellis Act is also beneficial to families who wish to live in the same building, perhaps to be close to or to take care of elderly family members. Other property owners benefit from the Ellis Act by evicting tenants then maximizing their long-term investment by selling the property to someone who can convert the building to commercial use. Other owners have used the Ellis Act to empty a building and then convert the building to condominiums to sell as individual units, also maximizing their investment (although now restricted in San Francisco). Three to four unit buildings are often owned by “mom and pop” investors who can no longer manage a building or no longer want to deal with troublesome tenants. The Ellis Act benefits these types of small investment owners.
A building occupied by tenants who pay far below market rent will in turn sell for a price significantly below market value. Through the proper use of the Ellis Act, these buildings are a great investment for the owner who wishes to occupy the property, convert the property, or otherwise remove the property from the residential rental market.