Surreal Estate Q&A #4: Deregulation of Mixed-Use Property

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“I have a building with a retail space on the bottom and a single apartment on top in San Francisco. The renter has been there for years, and I haven’t increased the rent yet. These days, his rent is well below market rate. I’m wondering if I can increase his rent, and by how much. ~ Michael”

Thank you for your question. First of all, if his initial term lease has expired, you can always increase the rent by at least the annual allowable rent increase, as published by the San Francisco Rent Board. And if you haven’t done this for a few years, you can actually “bank” past year’s allowable increases and impose them all at once. (You lose out on the equivalent of rent increase “compound interest” by waiting, but you don’t actually forfeit your allowable increase by waiting.)

That said, I think your question is directed more toward whether the dwelling unit is rent controlled. My first follow up question would be whether the building was constructed after 1979. However, the profile of this building (one commercial, one residential) sounds like it is probably not “new construction”.

So the only real issue here is Costa-Hawkins deregulates this kind of unit. The language of Section 1954.52(a)(3) deregulates a dwelling unit that “is alienable separate from the title to any other dwelling unit . . .”. The building is multi-unit, but because only one of the units is a dwelling unit, the entire building is technically “separately alienable” from other “dwelling units”.

That said, I would want to double check zoning and make sure that there was never any residential use of the downstairs space, to avoid the imputing of “residential use” to a non-residential unit, as was the case in the recent decision, Burien, LLC v. Wiley.



Market Rate… Moratoria?


Curbed SF reports that Bayview residents are rallying to extend the Mission’s proposed market rate housing moratorium to Bayview, the logic of a moratorium being all the more alluring to a community that saw a 75% increase in home values between 2010 and 2014, to the Mission’s 63%.

Supervisor Campos champions his proposed moratorium as a mechanism to slow gentrification in the Mission. However, as Grace Martinez of the Alliance of Californians for Community Empowerment urges, “If you do a moratorium in the Mission, they’re just going to build in the Bayview, so let’s protect our neighborhood as well”. That said, if Bayview were to successfully withstand the momentum of development deflected off of the Mission, one wonders which neighborhood would be up next.

Meanwhile, Supervisor Weiner continues to confront the concept of a moratorium generally, noting that such agendas undercut the City’s inclusionary housing program. See his recent post at


Supervisors Farrell and Weiner Request Economic Report for Mission Market Rate Moratorium

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The SF Examiner reports that Supervisors Mark Farrell and Scott Weiner have requested an economic evaluation of the impact of Supervisor Campos’ proposal to stop market-rate housing developments in the Mission. In response, Campos requested a 45-day moratorium, which he urges will have no economic impact. Weiner has previously expressed his disapproval of Campos’ proposal.


Naylor v. CCSF (Hirsch): Welcomed Clarity for Landlords in Withdrawing Rental Units under the Ellis Act

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Last week, the Appellate Division of the San Francisco Superior Court provided some much needed clarity on the provision of the San Francisco Rent Ordinance that requires a landlord to notify tenants of certain information about the proposed withdrawal of their rental units, in Naylor v. CCSF

Prior to withdrawing rental units under the Ellis Act, a landlord must serve termination notices on the tenants. The court ruled that, while the landlord is required to notify the tenants of their rights to re-rent the units from the landlord (if those units are put back on the market within ten years), he is not required to inform the tenants that they have these same rights against future owners of the property, because the Rent Ordinance does not require him to.

That said, the requirements of initiating and carrying out a withdrawal of residential units from the San Francisco rental market is highly technical, and challenges to the sufficiency of notice can be comically granular. (Or, in the words of the court, the nature of the disputes can be “quite focused”.) While Naylor seems to suggest (at least in dicta) that the proper measure of sufficiency is “strict compliance” with the noticing requirements, sometimes even that isn’t enough. Last week, the San Francisco Housing Court held that the landlord in Halprin v. Wolkenstein did not properly comply with the withdrawal provisions because, while he tendered relocation checks along with the notice of termination – as required by the Rent Ordinance – the tenants did not pick up the certified letters, containing those checks, from the post office, when they missed the original delivery.

This leads to “damned if you do” situations, where a landlord could find herself arguing that she complied by sending the tenants “replacement checks”, so that they would receive their relocation payments in time to spend that money relocating, but where the tenants argue that this replacement payment did not “strictly comply” with the Rent Ordinance because it came after the notice of termination.

And this is a tough break for a landlord who waited the required one year before testing the sufficiency of her compliance with the Rent Ordinance and who must start over again from scratch – tougher still when the earth can move under her feet in the middle of the process. As Surreal Estate posted last week, the Board of Supervisors passed a diluted version of last year’s Campos Amendment, increasing the standard relocation payment due to tenants from roughly $5,500.00 per tenant to $50,000.00 per rental unit. It is unclear based on the current language how a landlord, who has already started the withdrawal process under the current rules, is expected to retroactively comply with the new ones.


Supervisor Campos’ Strategy for the SF Housing Crisis: Mission First


Supervisor Campos is receiving a lot of press lately for his unconventional position that may be heading to the ballot this November. In an effort to mitigate displacement of rent-controlled tenants in the Mission District, and address the SF housing crisis generally, he is aiming to impose a moratorium on market-rate housing developments in the Mission.

According to the San Francisco Business Times, Campos and his camp have a counterintuitive view of the affect of market-rate housing in the Mission. Of course more housing means less pressure on pricing. But they say “demand for housing in the Mission is so high that increasing supply will never push down prices. It only raises property values near new development, ripening the appetites of developers looking to make a bundle from developing more high-end condos and apartments”. In other words, gentrification is a domino effect.

Campos has plenty of political momentum on this issue. The SF Examiner reports 65% voter approval for a one-year moratorium, based on a recent poll. Last week, a mob of supporters flooded City Hall to demand a dialogue with Mayor Ed Lee, and apparently wanted him to declare a state of emergency to halt evictions in the Mission.

Even with all this energy, Campos’ measure could have a branding problem at the ballot box: he’ll need to convince all the voters who don’t live in the Mission that less housing means lower prices. This is a difficult task, to be sure – especially when his own colleague, Supervisor Weiner, thinks “his moratorium is an awful idea”.

Economics aside, the goals of this effort may also a bit ironic. Existing development policy generally requires builders to create a certain number of inclusionary units. While Campos hopes the moratorium will buy time for the Planning Department to modify its inclusionary housing policy, others, like Edwin Lindo of the San Francisco Latino Democratic Club, apparently envision a market solution to emerge from the frozen market: “Our goal is not to stop all development. Our goal is to stop incredibly large development that focus exclusively on market-rate housing . . . We need a pause to ensure that if developers are going to build in our city they’re going to figure out a way to build affordable housing, even if that could be cutting into their 15 to 20 percent profit margins”.


San Francisco, Number One! (in Rents)


We did it, you guys… We’re still on top. SocketSite reports a record-setting asking price for apartments in San Francisco, as of first quarter 2015, of $3,458 per month. San Francisco renters may have reasons to be optimistic though. The rate of increase appears to be slowing (at least compared to rates in Oakland), and new construction projects should cause prices to at least flatten out eventually.


Residential Rent and Eviction Control Resources