Feature
by Marci Riseman
In 1999, my husband and I were thrilled to find an incredible bargain: a 75% occupied 4-unit building on a desirable street in Noe Valley for $100,000 under market value. Never mind the three long-term, low-rent, protected tenants; the suspicious odors in some units; and the 30 years of deferred maintenance. It was a deal!
On Closer Inspection
We bought the building and began to make repairs. There was a lot to do, but we considered it a long-term investment. We wanted to turn it into something beautiful and well cared for—something we could one day pass on to our children.
But repairing a building that has not been cared for in decades is different than repairing a well-tended building. Every time we tackled a problem, its scope would increase exponentially. We had far underestimated the cost of reversing deferred maintenance.
We explored all options for upside potential. After correcting the prior owner's illegal rent increases, we petitioned the San Francisco Rent Board for operations and maintenance, PG&E, and capital improvements passthroughs (an interesting task since the tenants had no leases, some paid in cash and the prior owner kept no records). None of these were enough to raise the long-term tenants' rents to even half of market rate, and we were not able to do better than break even.
As we made our repairs, we got to know our tenants. In unit #1 was kind, respectful, 60-year-old Lola (the names have been changed), who had raised two children in her immaculate apartment, had a stable job and was a community builder in the neighborhood. Unit #2 was occupied by Paul, who was 63 years old and whose apartment was so rank and filthy it made us wonder about the condition of the house he owned in Southern California. Joe was in unit #3; he was a sickly curmudgeon in his seventies who kept jugs of urine around his apartment. The market-rate tenants in unit #4 rotated over the years, but were always responsible, reasonable people.
While Paul made life interesting (he complained of multiple burglaries and asked us to change his locks; when questioned, he confessed that he had given his key to his cousin, who robbed him), it was Joe who quickly made himself known as our problem tenant. Joe called at all hours, leaving cryptic but dangerous-sounding messages like: "Please come right away. The thing is leaking. It's leaking a lot!"
When we made repairs, Joe would get angry and berate us. When we sent his annual rent increase notice, his retaliation ranged from illegitimate complaints to the Department of Building Inspection to flat-out denial (he once claimed, after years of communicating with us in English, that he no longer spoke English).
Joe's diabetes, heart disease and bad knees snowballed with his alcoholism, and despite the extra handrails and lighting we installed, he repeatedly fell down the stairs. Soon after we replaced his smoke detector batteries, the smoke detectors disappeared. (When questioned, Joe ranted, "You never gave me smoke detectors! I'm calling the inspectors! And besides, they were too noisy!") On the day he unplugged his stove, disabling the starter, and then turned the stove on—filling his apartment with gas—we realized that he had become a menace to himself and his neighbors.
When a unit in an affordable senior-housing complex became available, Joe's social worker was as baffled as we were when Joe turned it down. Since he wouldn't move into the nice, clean, federally-subsidized unit with an elevator, his fate continued to be our responsibility. It began to feel like some sort of twisted race: would Joe move or die before he set fire to his kitchen or sued us for a fall down the stairs?
Expert Opinions
Because of the difficult tenant profile and our inability to earn a return on our investment, we sought advice from professionals. Our lender told us two things: "You never sell a house on that street—it will only appreciate in that location," and "My wealthiest clients have only two regrets about real estate: not buying more and anything they've sold."
Our attorney suggested that we make an offer to the difficult tenants to vacate in exchange for "moving expenses," warning that the tenants might accept the offer and then sue us for wrongful eviction. Because one of the units was illegal, we ran the additional risk of having to pay back all the rent that these tenants had paid over their 30-year tenancy. Worse yet, during our ownership, various legislation was passed limiting a landlord's right to even talk to a tenant about moving.
Our attorney's other suggestion was to Ellis Act the building. We'd get out from under our liability burden and make a nice profit. Why not use the only legal means of getting rid of troublesome tenants, clean up the units and then sell them as TICs?
We didn't Ellis Act the building because—and I feel either embarrassed or proud saying this, depending on my audience—we simply could not. We couldn't evict kind Lola from her home of thirty years. But what's strange to admit is that we couldn't evict Joe either. Although he's a bully and a menace, he's also old, poor and sick.
Somehow, by owning this property and taking care of it, and doing the best we could with the tenants—no matter how ornery—we had come to feel responsible for them. At the same time, while we cared for our tenants' well-being, we were not able to continue subsidizing their rent, repairing a failing building and exposing ourselves to liability for no financial return. What to do?
The Tipping Point
As these questions were percolating in our heads, we were eyeing the real-estate market, which we felt was near its peak. We realized that if the market did go down, we could be stuck with this building and its liabilities. What if we wanted to get out in 5 or 10 years and couldn't sell? Would we get sued or suffer a dangerous fire before then? Suddenly, we had our answer: it was time to sell.
Basic calculations revealed that we could take the sale proceeds, put them in a savings account at 3% interest and make more than we were making renting the property. I felt like an idiot. For years we'd been working our butts off trying to make this property float, and it turned out that the only real value was in selling it. We put it on the market, and a week later accepted an offer.
Our asset had appreciated handsomely over the six years we owned it. However, the ability to earn more money risk-free at the bank than we can while encumbered
with the liabilities and frustrations of landlording is a real disincentive to ownership. It seems that for owners of rent-controlled units, selling is the only way to make money—a situation that does not help conscientious landlords stay in the business. And it certainly does not help tenants if caring property owners flee the business.
Although we didn't have the heart to evict Joe, we still found it ridiculous that San Francisco's eviction control makes it difficult to evict tenants who are a threat to their own (and their neighbors') safety. It is also ridiculous that our city's rent control rules limit rent increases to less than the cost of living—keeping rents at a level that discourages building repair and maintenance, exposing landlords and tenants to liability and danger. Rent control doesn't necessarily protect the poor, and it makes them more vulnerable to owner move-in or Ellis Act evictions because of the financial difficulty of owning rent-controlled units.
No Longer Our Burden
Last week I bumped into Lola. She told me that the new owner Ellis Acted the building, but she'd cut a deal and was moving at the end of the month. She cried while she told me this. I felt sadness and remorse that I couldn't do anything to help my favorite tenant.
The irony of San Francisco's tenant protections became clear: the laws that kept our tenants' rents artificially low made it impossible to maintain the building or withstand liability exposure. So we sold the property and now all the tenants have been evicted. Exactly whom did these laws protect?
We have escaped the particular burdens of the building we once owned but were not able to escape—or solve—the ethical dilemmas that accompany San Francisco property ownership. We are merely relieved that we no longer carry a burden that is too big for us.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Marci Riseman owns Pomegranate Design & Development in San Francisco. She writes on real estate, architecture and urban life. She can be reached at marci@pomegranate.com or 415-826-8860. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.