Conversation with Andrew Zacks, partner at Zacks, Freedman & Patterson, PC

Ruth Krishnan: Hey Andrew! Thank you so much for joining me today. I am here with Andrew Zacks, one of the partners at Zacks, Freedman and Patterson.

Andrew Zacks: Hi!

Ruth Krishnan: Andrew has been doing this for about 30 years. In San Francisco, as some of you may know, real estate agents review most documents on behalf of their clients, as opposed to New York, where attorneys are involved throughout the entire transaction. However, in San Francisco there are certain areas where attorneys are always involved and one of them is when a property is tenant occupied. In this case, we always ask our clients to consult with an attorney because laws are always changing.

I also have been meaning to talk to an attorney to get up-to-date with some of the new rent control laws because I have some rental property in San Francisco. I haven’t had a chance to fully get my head around the new regulations, but I’ll let Andrew take over from here and explain a bit more about rent control in San Francisco.

Andrew Zacks: That’s a pretty broad topic, but sure! Rent control was enacted in San Francisco in 1979. Originally, it was really designed for larger commercial properties and bigger buildings. It was expanded in 1994 to include owner-occupied buildings that are four units or less, and from there it was further expanded by state law within the last year into a different scheme of rent control, separate from San Francisco, and is a little more beneficial to owners. What people need to understand is that we now have statewide rent control. And then, of course, we have regulations that are put in place for the present emergency, which I don’t really consider to be rent control. These are temporary regulations that we’re dealing with on top of the existing laws that are evolving (literally) on a daily basis.

We’re seeing a patchwork of local regulations in cities, we have a statewide order, and we have federal regulations. And on top of all that, we have courts implementing their own special rules about whether or not landlords and property owners are going to be able to collect rent through eviction and unlawful detainer cases. All of this is evolving incredibly quickly and all of these questions are very specific to particular properties. The important thing to understand is that when you’re dealing with a landlord-tenant issue in San Francisco, whether in the context of a real estate transaction or not, it’s a good idea to talk to a lawyer.

Ruth Krishnan: Let’s talk through some specific examples. For instance, if I already have a single family home but bought a house in Los Altos, and I’m wondering “Is it a good time to sell? Could I rent my single family home for another year and then check on how the market is doing after that? Or would I get myself into a situation where a year later I won’t be able to ask the tenant to leave??” How does that work?

Andrew Zacks: Putting aside the temporary rules regarding the emergency, if you only own one home– in fact, if you own less than 10 homes– and the home is in your name and not in a corporate name, the rules haven’t changed much. Those rules generally state that there are no rent controls on an individual home that one person might own and may want to sell down the road. But there are still controls on evicting tenants out of that building.

Ruth Krishnan: As there always were, right?

Andrew Zacks: Correct. However, my personal view is that without meaningful rent control that attaches to a property, eviction controls generally don’t work very well. I believe there is a very simple way to be able to rent a house for a year and then be able to free it up for purposes of sale when the market (hopefully) turns for the better. I do think that can be done; it’s something people need to have a confidential conversation with their lawyer about, but it’s something that can be accomplished and something we have accomplished successfully in the past. As of now, the laws haven’t really changed in a way that would change that.

When properties are corporate-owned and if the corporation owns multiple properties, there are different rules at the state level that apply to corporations that are in the business of being landlords. As you may know, back in the 2009/2010 financial meltdown, a lot of folks lost their homes and some big venture-backed corporations bought a lot of single family homes throughout the country, including California. They basically turned these homes into rental properties; whereas before, they were owner-occupied. Those owners are going to have to deal with statewide rent control now. These rules are not the same for mom-and-pop owners who own a single house, two houses, maybe even three houses, as long as their properties are not in the name of a certain type of LLC or corporation (even then I think they can do it). Living trusts are fine. Everybody owns a house in a living trust.

Ruth Krishnan: We own three rental properties and they’re all in LLCs, but I wouldn’t consider myself a professional land owner or a corporation. Would the law define me as such?

Andrew Zacks: Are they separate LLCs?

Ruth Krishnan: We have two LLCs for three properties.

Andrew Zacks: I think you’re fine, but I would want to double-check the rules on that because this is all new for us. As I recall, It’s 10 properties you have to own before the statewide rules kick in. I think you’re protected, but we would still have to check that.

Ruth Krishnan: It sounds like as far as the new rules go for the statewide rent control, they’re pretty much the same, correct? Unless you’re some big shot landowner.

Andrew Zacks: That’s correct. San Francisco has taken advantage of the new rules and has expanded eviction controls to new properties that didn’t previously exist. It used to be that there was a broad exemption for eviction controls for buildings that were built after 1979– local rent control didn’t attach. After the statewide rent control law passed, San Francisco also expanded its rent and eviction controls (mostly eviction controls) to new buildings. If you have a condo building that was built in 1990 or 1995, for example, those buildings now have eviction controls that they didn’t previously have.

So yes, the rules are basically the same for single family homes, unless you’re a corporate landlord. There have not been substantial changes. There is one ordinance that San Francisco has enacted that is currently under attack in the courts. In this ordinance, the city is attempting to create liability for a property owner who raises the rent in a single family home to allegedly try and drive the tenant out, in what they call a “bad-faith rent increase” form of wrongful eviction. In my view, it should be perfectly fine for a landlord to give large rent increases if there is no rent control. Why? Because there is no rent control. The Apartment Association and other groups are challenging this in court, and I think they will ultimately succeed. My view is that the state can’t exempt you from rent control but have the city say, “Well, if you raise the rent too much then we’re going to create liability for you.” This is an open question right now as to whether that can happen. If you’re going to raise the rent in a single family home, you ought to be careful about how much you raise it by. You don’t want to raise it too much to where you could be accused of acting in bad faith.

Ruth Krishnan: I see. So in the first example I gave where my client bought a house in Los Altos and rented their single family home for a year while waiting for the market to hopefully change, the way they would most likely encourage their tenant to leave would be by increasing the rent, is that right?

Andrew Zacks: Correct.

Ruth Krishnan: That’s the way it’s always been done, correct?

Andrew Zacks: Absolutely. The way we would typically advise a client in that situation is to tell them to write it into the lease. That way, both parties are agreeing that the rent is going to automatically go up after a year. You can always renegotiate those terms when you get to the year if you want to, but it’s a good idea to have your tenant actually sign off on something like this so they understand they’re not going to be there for a long time.

Ruth Krishnan: That’s smart. And you’re being very upfront about it.

Andrew Zacks: Exactly, and you could never be accused of bad faith at that point because that is what the tenant agreed to.

Ruth Krishnan: Got it. That brings me to the question of leases. A lot of clients tell me, “I’ll just have a lease that will end after a year.” But in San Francisco, that doesn’t mean anything, right?

Andrew Zacks: It doesn’t, because you have “just cause” evictions even in these single family homes. So the fact that you now have a month-to-month tenant isn’t grounds to terminate the tenancy. You still need some reason to terminate– whether it’s owner move-in, Ellis Act, non-payment, nuisance, etc.– there are 14 grounds under the rent ordinance that you have to fit into.

Ruth Krishnan: That’s a really good tip. If I have a client thinking of holding something for a temporary amount of time, they can just call you, you can help them write a lease, and that lease is going to stipulate that within a year, 18 months, or however long it is, the rent is going to go up by a certain amount (i.e. $2,000). That way, the client is going in eyes wide open and will be able to essentially say to the tenant, “You’re probably not going to stay because I want to sell my house.”

Andrew Zacks: Exactly. In that case the tenant understands that this is not a long-term arrangement and that if they want to stay, it’s going to cost significantly more. You can also make it clear as part of your negotiation that if people change their mind (for example, if the person who wants to sell her home in a year decides, “Maybe this isn’t the right time, I want to do another year with my tenant”) you can always renegotiate that amount at the time and reset it for another year.

Ruth Krishnan: That’s brilliant.

Andrew Zacks: I am very confident in that procedure. We’ve used it many times and we’d be happy to help folks who are in that situation.

Ruth Krishnan: I like that because there’s nothing shady about it. Everybody understands it going in and it’s super fair, so I like that.

Andrew Zacks: You’re also not going to ever have to give a rent increase because it’s built into the agreement. Therefore, the landlord’s acts cannot be accused of being harassing, bad faith, or somehow fraudulent because this is all self-executing with the agreement that the tenant, themself, signs.

Ruth Krishnan: That makes sense. Why is it that in San Francisco some kinds of properties have rent control while others don’t? When I say rent control, I mean in the sense that you can’t ever increase the rent. For instance, some TIC multi-unit buildings have that while other ones don’t.

Andrew Zacks: That’s a combination of state and local law. The local ordinance which was enacted in 1979 had a broad exemption that made it only applicable to buildings built before 1979. The intended purpose of that was to encourage the construction of new housing, but it’s generally considered to be a disincentive to build rental housing if there’s going to be strict regulations like rent control. Acknowledging that it would be a bad thing for San Francisco to restrict or disincentivize the creation of new housing, the drafters of the original rent ordinance in 1979 exempted new buildings and new construction.

In addition to that, there’s a state law called Costa Hawkins that was passed in 1995. Costa Hawkins was designed to do a number of things that are pretty complicated and probably out of the scope of this conversation, but for purposes of answering your question, Costa Hawkins contains broad exemptions for single family homes in terms of rent control, and it also contains broad exemptions for condos. There are also exceptions to that for pre-existing tenancies. So if somebody lived in the building before January 1st of 1996, even though that property is exempt under state law, the tenancy of that person is grandfathered and protected. If you have a long-term tenant in a condo or a house who has been there more than 24 years, those people still have protection. But for most people who live in single family homes and condos, as a result of Costa Hawkins state law, there cannot be rent control. This is a timely discussion because there is a ballot initiative that’s going to be voted on in November, which seeks to roll back those protections. A guy by the name of Michael Weinstein in LA has banded together with tenant activists and for the second time in three years, they’re trying to effectively repeal the Costa Hawkins protection. Costa Hawkins is a very important protection for property owners so the repeal is something we should all be opposing, voting against, and doing what we can to make sure it doesn’t become a change in the law.

Ruth Krishnan: If that is repealed, does that mean essentially all properties will have rent control?

Andrew Zacks: No, unfortunately it’s not that simple. Let me just say that it would involve a reset of the rules– again, this is probably beyond the scope of this conversation and hopefully we’ll never have to have that conversation because hopefully it won’t pass. When they attempted to enact it two years ago they failed by about 15-20%. Property owners spent a lot of money to push back on it. We’re certain it will be an active opposition. It is a less severe form of repeal, so there are still exceptions and I think there are still exceptions for single family homes. It’s really designed to apply to more corporate landlords but since it hasn’t become law, I just haven’t had the time to spend studying it carefully. But let’s just say that people should be following that because there could be further changes in November.

Ruth Krishnan: One of the things I see in my everyday life is that there seems to be some major unintended consequences from these rent control regulations. From my perspective, it looks like rent control was put into place to protect tenants so that as rents increase, they don’t go to exorbitant prices, which in turn allows us to have a nice diverse class of people living here. We can have baristas, teachers, and all of the important people that are right now keeping our world running. But what I see happening a lot of times is that people end up either keeping their places vacant whenever they move because they’re worried about rent control, or they sell them because they are so worried about getting into a situation where later they have a person who they can’t get out. Are there any other unintended consequences?

Andrew Zacks: First of all Ruth, let me say I 100% agree with you. The law of unintended consequences was basically written by rent control laws. Almost every single regulation that we have seen enacted over the ~40 years of rent control has had some unintended negative consequence for San Francisco. The first example that comes to mind is that even though we’ve had these laws to keep rents low in place since 1979, we see that the housing market in San Francisco is actually one of the most expensive in the world and the rents here have continued to rise, in part, because of the unintended economic consequences of rent control. Number one, rent control discourages the creation of new housing, and we know San Francisco has a shortage. Number two, it encourages people to not rent their properties out and to instead, try and change the use of the rental property to other uses like TICs, condos, and other forms of use. As laws have been ramped up, we’ve had hundreds of changes to the law since it was first enacted and none of them were beneficial to property owners. Each law is just more regulation on top of another regulation.

All of those laws have had the effect of forcing people out of the business because they don’t want to deal with the liabilities associated with being a landlord, and negatively affecting the rental housing market in general. If you talk to nine out of ten economists, professionals, educators, or people that are in academia, they will tell you that rent control does not work except for one thing. And that one thing is that it keeps rents down for the tenants that are in possession– the people that are already there. So, if you have yours, you are protected. But how do we know who is in possession of these units? What we know is that there is no means testing for rent control, so it doesn’t matter if you’re Bill Gates renting from Mark Zuckerberg, you get protection. And that makes me absolutely go mad.

Ruth Krishnan: That makes me so mad. I have had people call me and say, “We’re making $600,000 a year, but we’re in a rent-controlled apartment,” and these same people are sometimes doing really shady things like renting their rent-controlled apartment to somebody else while they go buy a house. But what about the person who owns that apartment? It’s just completely mind boggling to me at that point.

Andrew Zacks: What you’re pointing out, Ruth, is one of the unintended consequences, which is that we now have a secondary market in the asset of a rent-controlled unit. We see that every day in my office– people profiteering off of their units. These people can make so much money from having sub tenants in their rent-controlled apartment, that they don’t even work. At the end of the day it’s theft, so I would say that theft is also one of the unintended consequences. People’s hard-earned assets are being taken away from them by rules and regulations that aren’t working very well.

Ruth Krishnan: Right. I once had someone come into my open house and tell me she had a rent-controlled apartment. She owned a beautiful home in Sonoma, but she had a rental studio in Russian Hill from when she was young that she was paying something like 500 bucks a month for. So she’s going to keep that unit forever as another source of income.

Andrew Zacks: And she’s going to fight for it if anybody tries to take it away from her, even though she’s not entitled to rent control in that circumstance. I have a similar story. We own a home in the city, and I won’t say where it is, but our next door neighbor bought this beautiful home 15 years ago and started to remodel it. It’s still being remodeled 15 years later and it’s never been lived in. I don’t know for a fact, but I strongly suspect that she has a rent-controlled apartment somewhere that she just can’t get her arms around giving up. So we have this beautiful single family home right next door to ours that’s been sitting empty for 15 years because somebody has a rent-controlled apartment somewhere else. Again, that’s why we have a shortage of housing, because of rules like that.

Ruth Krishnan: This probably isn’t going to be a popular opinion, but if I were to pretend to legislate for a minute, I would give some trade-offs in the rent control department because of the reasons I mentioned earlier. I’d make it so that people couldn’t necessarily have second homes in San Francisco because there really is a housing shortage. I’ve had times when I was selling a $3-$4 million condo in a high rise, and oftentimes it would potentially be the fourth or fifth home for the buyers that were coming in. And they only plan on being there for about a month out of a year. It’s nice to have those people in San Francisco, but to me, that’s part of the problem. It’s a problem that there are a lot of vacant properties sitting there that aren’t being rented out part-time because of these laws. It seems like a better option to me to cut that out.

Andrew Zacks: I agree. I think that would be a fair trade-off in exchange for means testing. What we really need is for rich people to not have rent control. It shouldn’t be a circumstance where a mom-and-pop landlord, who may even be senior citizens in their retirement days, are renting to a tenant who makes a lot more money than them, and every month their rent is being subsidized by the landlord who makes less than them, or maybe even has fewer assets than them. That is a common occurrence in San Francisco and that was not the purpose of rent control.

Ruth Krishnan: Right. And then you have all these buildings that those landlords can’t afford to take care of because they’re not getting the proper rents, so they’re getting rundown.

Andrew Zacks: Absolutely. I call it urban blight.

Ruth Krishnan: One thing I heard you say but wasn’t clear on, is that one of the unintended consequences of rent control is that it doesn’t encourage building. But I also thought I understood that new buildings are not subject to rent control. What did you mean by that?

Andrew Zacks: What I meant by that is that the developer or contractor who’s going to be building new construction always has to be concerned that the rules that currently apply to older buildings might be rolled over and applied to them. And that’s exactly what has happened. That promise that there would be no rent control on new construction has been overtaken by statewide rent control because now we only have a 15-year rolling exemption. Rather than anything built after 1979, it’s anything built in the last 15 years, and every year that’s another 15. So for the person whose building is 16 years old, theirs becomes subject to rent control under state law.

Basically, the promise that was given to developers and builders of housing has not been kept because they changed the rules out from under them. People are naturally worried about that and that’s going to cause capital to flee California and go elsewhere to invest, where they have more certainty. Let’s be clear, rent control is a huge exception throughout the United States. It doesn’t happen very often, there are only a few states that have allowed it to happen, New York being one of them. There are a couple others, but in most places there is no such thing as rent control and it’s considered to be unconstitutional.

Ruth Krishnan: If I am buying something that is currently tenant-occupied and I want to live in it, how do I go about doing that?

Andrew Zacks: You consult with an attorney.

Ruth Krishnan: Of course. I’ll call you first.

Andrew Zacks: Consult with an attorney because every case is going to be different. Let’s just say there are a number of strategies that we would use depending upon the particular facts of your circumstance. We always do a careful analysis of the tenant profile, how long the tenant has been there, and what kind of an asset the tenant has in terms of how below market their unit is. I would generally say that trying to buy the tenant out is usually the best way to go. There are significant regulations in San Francisco for the process of buying out tenants. Even if it seems simple enough to make a deal with a tenant (i.e. I’ll give you some money, you’ll move, you’ll give up your lease so you give up your rent control rights, you waive your rights, etc.), it’s not that simple anymore.

Now we have a careful process at the Rent Board that has to be followed. It’s a public process.  The agreement has to be filed at the Rent Board and there are significant penalties for not doing that. It’s hard to answer a general question about what I would do, because every case is unique. But each case does require a careful analysis of what approach should be taken based upon who the tenant is, what they do, how committed they are, and how deeply rooted they are in the community. Given the years I’ve been doing this, there are certain cases where I can look at a tenant profile, and eight times out of ten I can figure out whether it’s going to be a problem to buy the tenant out. I’m pretty accurate on that analysis. I can sit down with a client for an hour over the phone or Zoom conference, which I think may be the new way of doing things now because even after we get back into our offices, it’s pretty easy, right?

Ruth Krishnan: Zoom has changed my life. I’m going to use it now.

Andrew Zacks: I think it’s going to change a lot of our lives and hopefully some of it will be for the better. It’s obviously not for the better right now. But my point is that it’s not that hard to find somebody knowledgeable who has been doing what we do for a while, pay them for an hour of their time, and have them do a careful analysis of what the best approach is for your particular client.

Ruth Krishnan: Now that the buyouts are public information, what is the average buyout for someone like a Google employee who has been in a rental for three years and now the landlord wants to move in or sell it. How much do you think the landlord has to pay to get that person out?

Andrew Zacks: It’s a hard question, but it’s a question that can be answered by looking at the Rent Board data. The Rent Board maintains data and averages that you can pull up online and find out what people are actually paying. You can’t tell who the tenant is or what the tenant profile is because the tenant’s information is wiped out. The landlord’s information is all public but the tenant’s information is all confidential. Generally speaking, the closer the rent is to market, the less the landlord pays. The buyouts range anywhere from $10-$20,000 on the low end, and that is really the minimum because of what you have to pay to do an eviction (which is another cost). That’s your base point (it has to be more than that usually), but they can go up to $300-$400,000. Unfortunately, there are people that are able to leverage their long-term tenancies and have good counsel, and there are property owners who feel it is worth paying that much for. I hate it, it’s sickening. It’s nauseating when that happens, but there are still people who are paying that much, unfortunately. In New York, it can be millions.

Ruth Krishnan: Really??????

Andrew Zacks: Yes.

Ruth Krishnan: I had a two-unit building that we sold last year where the top unit was rented by a protected tenant. My client was a senior who had bought it 30 years prior. When she rented it to this tenant, the tenant was over 60 years old. I know it’s not legal, but I think a lot of times people don’t rent to seniors.

Andrew Zacks: Generally speaking, I think people will do their best to avoid renting to seniors. Even though you’re right, you can’t discriminate in that regard. But yes, another unintended consequence is that people will do what they legally can to avoid renting to seniors because there are more regulations attached to it. Anyway, I’m curious about how that turned out for your senior client & her senior tenant? Did she have to pay a lot?

Ruth Krishnan: It was an interesting process. The tenant had been there for about 10 years and their rent was around $2,500 while the market rate was about $6,000. They basically calculated what it would cost for them at ($6,000-$2,500) x10 years, and they came up with about $300,000 they would need to pay over the next ten years. They argued that now that was my client’s obligation to pay them the difference. Meanwhile, my client was selling because her husband had Alzheimer’s and she needed to take care of him. This was their asset.

Andrew Zacks: It’s heartbreaking to hear that, Ruth.

Ruth Krishnan: I think they came to a negotiation and settled on $200,000. But then the person downstairs, who was a nurse, said in her estoppel that she believed she was protected because she had some disabilities. So even though she was working full-time, the people buying that felt like that was a huge red flag. Ultimately, her two-unit building traded. It traded for much lower than it should have. This tenant refused any sort of buyout and afterwards sued my client for pain and suffering.

Andrew Zacks: That’s the battleground we live in here in San Francisco. If it wasn’t so absurd, it would be sickening and sad. I don’t even know how to describe it. I obviously live in the middle of it, so I become a little jaded, but when I hear stories like that it still breaks my heart; particularly when you’re talking about a senior couple, one of whose husband has Alzheimer’s and she’s just trying to do the best she can for her family. That same client also provided affordable housing for two families and important members of our community, and rather than getting a medal, she got a lawsuit. They should have given her a medal for doing that.

Ruth Krishnan: I see stuff like that and it makes me scared. That’s why I don’t specialize in investment properties.

Andrew Zacks: There are opportunities for people who probably have more nerve and guts than we do. To me, it goes back to the question of why is it the responsibility of the individual small mom-and-pop property owner to house the people that need housing in San Francisco? Why isn’t it our collective obligation as a community and society to find a way to provide affordable housing? Why not place the obligation on our elected representatives, or in some ways, our voters? To place that important obligation onto the backs of one part of the community, which happens to be the property owners, I believe is a crime and I think it’s unconstitutional too.

Ruth Krishnan: I could talk to you all day about this stuff but I know you have better things to do. I really appreciate you taking the time to walk us through some of this stuff. It’s been really valuable. I know there are questions on a lot of people’s minds about things they don’t understand. A lot of people’s heads are probably spinning and they’re thinking, “Wait, why? 1960, 1978?”. The bottom line is, it’s very complicated. Anyone thinking of doing anything with a tenant should always seek professional help before buying or before even speaking to a tenant. You are one of the top firms in San Francisco and I will absolutely refer my clients to you.

Andrew Zacks: Ruth, thank you for that. Those are very kind words and I hope we can get together again for another session to cover the rest of the topics we weren’t able to cover today. I’d love to do it. I’m very honored to have been here with you this morning. Best of luck and let health be in your family.

Ruth Krishnan: Good! I’ll take you up on that and we’ll do a part two then. Thank you so much.

Andrew Zacks: Thank you, Ruth.