Why San Francisco Tenant Laws May Change

San Francisco is one of the more unique rental markets in the U.S., as owning property in the city is simultaneously one of the best investments a landlord might make, as well as potentially the worst. This is due to the fact that the city has seen an explosion in rental rates over the last five years, and city leaders have started to take legislative action to address what they view as a housing crisis. If you already own property in the city, or are considering a property purchase in the near future, it’s a good idea to keep up-to-date on the latest developments in what has become a fast-moving and frequently changing legal landscape for San Francisco rentals.

State of the San Francisco Market

San Francisco is among the strongest rental markets in the country, with vacancy rates sitting at around 3 percent currently, which in itself represents a sharp drop from 2011 when rates were around 4.1 percent.

Prices are equally strong, with a median rental rate of $3,120 for a one-bedroom apartment, according to a recent analysis from Priceonomics. Two bedrooms rent for a median of $4,000 and three bedrooms for a median of $4,795.

While this may seem like an ideal situation for landlords at first glance, those lucrative market numbers have meant that low- and middle-income renters are being pushed out of the city. Public opinion has pushed lawmakers to begin addressing those concerns through legislation, which casts an uncertain light on the prospects for property investment.

Recent Housing Laws in San Francisco

The city has seen a relative wave of new legislation since 2013, but two laws are of particular interest for rental landlords.

In-Law Units

In-law units are secondary apartments attached to a primary rental residence, usually used as an economy studio or lower-priced add-on. Think “the apartment above the garage” or “the converted basement,” and you’re on the right track. In many cases, these in-law units have skirted the bounds of legality, although the city, by its own admission, usually turned a blind eye to the situation.

In the interest of making as many units available as possible to ease the housing crunch, city leaders voted in early 2014 to effectively institute an “amnesty” program in which landlords with dubiously legal in-law units could voluntarily apply to have those units officially approved and made legal for rental on the open market, as long as they were built before January 1, 2013.

Relocation Fees

Prior to this year, landlords could often only successfully push through an eviction using California’s Ellis Law, due to stringent tenant rights codes in San Francisco. This law allows a landlord to seek an eviction in order to “retire” from the market and stop renting the property, either to move into it themselves, or sell it outright. It required landlords to pay relocation fees to the tenants, usually amounting to around $5,200.

However, the city passed a law in July of 2014 that significantly increased that fee’s maximum to discourage property speculation, and some landlords have already discovered that they would be on the hook for more than $100,000 in re-location fees for longtime tenants. Unsurprisingly, the law is facing stiff legal challenges, and is currently working its way through the local court systems, with a final decision hoped for by the end of the year.

Future Legal Concerns in San Francisco

The legislative landscape is still very active, but landlords need to keep their eyes on two current proposals in particular. The first addresses the phenomenon of short-term rentals. Many San Francisco landlords have begun renting units through services that offer short-term rentals that function more like hotels than rental homes, e.g. Airbnb. This issue is exacerbating the housing shortage, according to public and political opinion. The Board of Supervisors is currently considering a proposal that would regulate the short-term market and require landlords to register with the city, pay hotel taxes and only engage in short-term rentals for limited periods throughout the year.

The second proposal aims to curb short-term investment or “flipping” by instituting a graduated anti-speculation transfer tax on newly purchased properties. The proposal would levy a 24 percent tax for properties sold within a year of purchase, with the amount decreasing every year until it hits zero percent after six years.

Although these proposals are in flux, the same can be said of many laws that have already been passed and are facing court challenges. It’s an uncertain landscape in one of the most lucrative markets in the country, and San Francisco landlords need to be particularly vigilant in keeping up with the developments that may impact their investments.

Posted on Dec 08, 2014


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