From the November 2005 Newsletter:

Selling your building off as Tenancies in Common

With all the news today about TICs (also, see our Question of the Month, following) and how the usual suspects on the Board of Supervisors having been working to destroy that market, many property owners have considered selling off their buildings as individual TIC units. Where the building is tenant-occupied, the process of preparing a building for sale as TICs involves the recovery of all units from the tenants, either by buying out the tenant's rights or by eviction using the Ellis Act. Each has its problems.

Tenant buy-outs are frought with many problems. Often, tenants refuse to be bought out, and if done improperly, a failed attempt to buy out a tenant's rights can lead to a wrongful eviction lawsuit. If you can buy out a tenant's rights, the price will be substantial. And even if you can buy out some of your tenants, you may not be able to buy out all of them. Those you can't buy out tenants will be left evicting the rest under the Ellis Act.

The Ellis Act is one of the 14 just cause reasons a tenant can be evicted. Under the Ellis Act, you may seek to evict all the residential tenants in your building if you wish to exit the business of being a landlord in that building. In order to invoke Ellis, you must serve a 120-day Notice of Termination of Tenancy on your tenants. You must pay relocation expenses. The relocation expenses required in 2004 were $4,500 per household if the household was "lower income." Supervisor Peskin passed legislation which changed the relocation expenses this year to $4,500 per person, up to three persons per household, whether the tenant was "lower income" or not. This legislation was challenged and Judge Warren ruled it unenforceable because it conflicted with state Ellis Act rules. The City has appealed this ruling and Judge Warren has refused to stay its enforcement pending appeal. Thus, there is confusion as to whether the old rule or the Peskin rule currently applies. Most, but not all, landlord attorneys have taken the conservative approach and paid relo-cation payments under the Peskin rule.

In addition to the basic relocation expense rules, there are rules regarding tenants 62 years or older or disabled. These tenants may extend their tenancies to one year and are entitled to an additional $3,000.

To further complicate matters, if you evict a tenant under the Ellis Act who is 60 or older and has lived in the building for 10 years or more, or who is disabled as broadly defined under federal statute, you have done a "dirty eviction" and affected the condo-conversion rights of the building as follows: (i) for 2-unit buildings in which both units have been occupied for a year, you lose the right to condo convert through the fast track rules which allow for bypassing the condo conversion lottery, and (ii) for all other buildings which would qualify for the condo conversion lottery, you're put in a special pool of "dirty eviction" buildings, making chances of winning the condo conversion lottery even more infinitesimal than than they already are, if that's possible. An additional factor to consider: If your building is five units or more, the Department of Real Estate now requires you to obtain a public report before the units can be marketed. A recent court case ruled that a landlord who had offered to sell a tenant his unit before getting the public report was guilty of "unfair business practices" under state law.

Many property owners have traversed these obsta-cles and been rewarded handsomely for their efforts, but it takes careful calculation of the costs of dealing with your tenants. One potential solution is to offer the unit to your existing tenants for purchase. If the tenant is a willing and able buyer, there can be a number of benefits to this arrangement. You may be able to avoid sales commissions, you don't have to worry about buying-out or evicting the tenant, and you may benefit from not losing cash flow that comes with the delay between the time you evict a tenant and the time you sell the unit. These cost savings can and should be passed on to the tenant as incentive to buy. Selling your property as TICs, and more particularly selling a TIC interest to an existing tenant, requires the advise and assistance of a competent attorney.

Probably the best reason to sell to a ready and able tenant is to chip away at the population divide between landlords and tenants. The more tenants that we can turned into property owners, the more likely we'll eventually see a Board of Supervisors that understands the benefits of homeownership.

Jeffery P. Woo is a member of the Board of Directors of SPOSF and a well-known San Francisco property rights attorney. He may be reached via email at: woo@mypropertyrights.com

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