Laws making it more difficult to own rental housing will worsen housing crisis

It says a great deal about California’s dysfunctional housing market that the state has to have a law that allows people who own rental housing to go out of business.

But that is the case. It has been on the books since 1985 after the Legislature, following extensive negotiations with landlord groups and tenant associations, approved what is known as the Ellis Act, which was written with the expressed intent “to permit landlords to go out of business.”

The impetus for the law was an unworkable Santa Monica law that required a landlord to obtain a city permit before taking any rental units out of the local housing supply. The permit could not be issued if the individuals who occupied the units were of low or moderate income, or if the city determined the action would adversely affect the housing supply. The law stopped owners from going out of the rental housing business in a city that kept rental rates so low that owners could not maintain their buildings.

Under that scenario, owners could not convert the building to ownership housing and move their families into their own property or sell to others who wanted to own the building and live there.

The Ellis Act is necessary only in the jurisdictions that have some form of local rental control ordinance in place. It includes substantial protections for tenants (a one-year notice and large relocation fees) and ensures that landlords don’t use the law as a means to subvert rent control.

For instance, if the building is converted to ownership housing, the city can prohibit the owner from converting the building back to rental housing and rented at higher rents. Also the city can require that if a rental property is demolished and a new one built to take its place, rents on the new accommodations will also be subject to rent control.

In other words, the Ellis Act cannot be used to convert rent control property to market-rate rental housing.

The Ellis Act is rarely used. Data from San Francisco show that it applied to just 107 rental properties in 2020 – or 0.047% of the city’s 226,00 renter-occupied units. And even in these circumstances, the buildings were small. 

Still, there are circumstances in which it provides common-sense protections.

If, as is increasingly common in high-priced real estate markets, a group of people – even current tenants – pool their resources to purchase a small rental property with the intent of living there, the Ellis Act enables the landlord to sell it to them and allows them to move in.

If a family wants to combine two or three smaller units that they own into a larger one to accommodate parents or extended family, the Ellis Act makes that possible.

If these scenarios seem far-fetched because your idea of rental housing is a high-rise apartment building or a sprawling apartment complex, it’s time to broaden that vision. The Department of Housing and Urban Development reports that 48% of rental units nationwide are properties with four units or less.

A bill that sought to weaken the Ellis Act and again open the door to illogical restrictions was wisely allowed to die in the Assembly last month.

The fact that this ill-thought-out bill was able to reach the floor of the Assembly is testament to the extreme frustration Californians are feeling about a broken housing market that has pushed the price of ownership out of reach for so many, driven rental rates higher and produced a surge of homelessness that is overwhelming our cities.

This bill would have done nothing to alleviate any of that.

It’s crazy that we need a law to protect building owners who need to exit the rental market in rent control cities. We wouldn’t need a law like this if state and local lawmakers focused on the urgent work of actually addressing California’s housing crisis – taking actions that would spur construction of new housing stock, promote affordable housing and create shelter for those who have no homes.