While it may seem paradoxical for a property owner to choose to keep a unit vacant, the operation of the Empty Homes Tax was much more insidious than the terms “unoccupied, uninhabited, or unused” implies. For instance, a homeowner would be required to pay the tax if they let their mom live there, full time, instead of one of San Francisco’s tenants.
This is because the tax applied (full stop) unless an owner qualified for one of the enumerated “vacancy exclusion periods”, which included certain logical things, like an owner living in the unit where they take the homeowner’s exemption, a unit with a bona fide lessee, or even an otherwise “vacant” unit being renovated during a one year period for permitted work. But an owner could not otherwise “occupy” a second unit (as additional living space, a home office, storage, etc.), and again, occupancy by a family member was also penalized, even if that family member was a bona fide tenant paying a market rate rent.
There were also reasons a property owner may have wanted to keep a unit literally vacant at that time. Recall that San Francisco was, by many metrics, the US city that had the hardest time recovering from the pandemic. For rent controlled units, the “base rent” is set at initial occupancy, and it may only grow at a rate of 60% of regional CPI, and so many property owners also had a financial motivation to decline to set an artificially low “forever rent” for their units in a historic nadir.
Individual property owners, the San Francisco Apartment Association and the Small Property Owners of San Francisco Institute, and the San Francisco Association of Realtors challenged the tax, arguing that it constituted a “taking”, that it violated privacy, equal protection and due process rights concerning the penalizing of families living together, and, importantly, that the right to choose not to rent one’s property is protected by the Ellis Act.
The Ellis Act is a California law that dictates that “no public entity. . . [shall] compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease”. Since its adoption in 1985, the use of the Ellis Act has perhaps universally relied on the prohibition on cities requiring owners to continue to offer units. In other words, landlords are allowed to terminate tenancies. And while this statement sounds non-controversial, keep in mind that cities are permitted to narrow the grounds for eviction when the tenant is not at fault.
In fact, this is exactly what Santa Monica did in its initial eviction control ordinance, essentially requiring property owners to maintain their rental business at a property, unless they established that they were entitled to permits to demolish the building on a showing that (among other things) demolition would not adversely affect the housing supply. When a landlord applied for such a permit, and was denied, he challenged the ordinance. But the Supreme Court of California held that such an eviction control ordinance was a lawful exercise of a city’s police power. That decision was Nash v. City of Santa Monica (1984) 37 Cal.3d 97, and the Legislature rebuked it the following year by adopting the Ellis Act.
While rent and eviction controls operate to stabilize rental housing, the logic of the Empty Homes Tax worked differently: even when a property owner did not already have a tenant in a rental unit, the tax compelled them to convert the unit to rental property, providing a tenant with a right of exclusive possession, subjecting the return on investment to a scaled percentage of inflation, and subjecting them to all of the liability that comes along with providing housing in an overly regulated marketplace. In other words, where most uses of the Ellis Act are based on the landlord declining to continue to offer housing, this challenge relied on the right not to be compelled to do it in the first place.
The lawsuit challenging the tax was granted at the trial court level on all grounds. The Court of Appeal affirmed along simpler lines: declining to reach the constitutional issues (finding it unnecessary), it simply found that the tax attempted to compel property owners to rent: “It is therefore ‘self-evident’ from the language of the Act that the Legislature intended to prevent owners from being compelled to rent their residential property by the actions of public entities.”
The opinion is available here.
