Why your rent is ridiculous

Californians have been waging political battles over land, housing, and taxes for a while. These are just a few key policies that make it difficult for SF and the state to build affordable housing.

In 1970, state lawmakers passed CEQA, the California Environmental Quality Act, to help protect California’s natural environment. The law requires city and state agencies to publicly disclose every project’s environmental impact, often in the form of an Environmental Impact Report (EIR), and propose alternatives to minimize the damage. While CEQA has helped reduce pollution, urban sprawl, and greenhouse gas emissions, it has also had a profound impact on land use planning, especially in SF.

Anyone can submit a CEQA appeal, sometimes anonymously. They’re cheap to file and they have about a 50% chance of winning. Also, there’s no limit to the number of times a project can be sued under CEQA.

In 2006, the SF MTA wanted to add 34 miles of bike lanes in the city. A CEQA lawsuit claiming that the city had not conducted an environmental impact review (required under CEQA) delayed the plan for four years. The MTA ended up spending more than $1M drafting a 1353-page EIR explaining in detail why better bicycle amenities would have a positive impact on the environment.

CEQA is purposely broad and powerful to protect our environment, and while it legally gives people a voice, it can also be used to slow or stop development altogether.

In 1978, CA voters overwhelmingly passed Proposition 13. At the time, the country was reeling from an “urban crisis”– people were losing their jobs and homes, and amidst all of that, taxes were on the rise. Prop. 13 was a popular initiative because it caps property taxes to 1% of the purchase price of the house. (Under the law, the property value can increase by 2% each year to account for inflation.) In other words, two neighboring homes can pay vastly different property taxes. If you bought a house for $70K, for instance, you would only pay $700 a year in property taxes. It doesn't matter if 30 years later, your house is now worth $1.5M and your neighbor is paying $15,000 in property taxes compared to your $1,267 ($700 + 2%/year inflation on the value of the house). It's a win for homeowners, but it has since created a slew of unintended consequences.For one, state and local governments lost a major source of revenue. After Prop. 13, revenue from property taxes declined by nearly 60%. As a result, local governments had to make up the money by:

• Not investing in as much growth so they didn’t have to deal with associated public infrastructure costs, i.e. public schools, roads, transportation, waste, etc.
• Increasing fees on developments, thus, increasing costs for developers, prices on homes, and rents on apartments.
• Generating tax revenue elsewhere. After Prop. 13, cities and counties increased sales, hotel, and utility taxes by 600% to make up for the lack of property tax revenue.

Cities are incentivized to approve more retail versus residential developments because they earn more from sales than property taxes. This “fiscalization of land use” contributes to our local and regional affordable housing shortage, but it's unclear by exactly how much. Prop. 13 also discourages longtime homeowners from moving, which reduces turnover in the housing market. In many ways, Prop 13. is inadvertently making it harder for people to own homes.

On the plus side, legislators are well aware of these issues, especially in light of our statewide housing crisis. Various groups are leading ballot initiatives to amend Prop. 13, but homeowners love Prop. 13, and they’re a political force to be reckoned with. (see #2)

The 1986 Ellis Act allows landlords to evict their tenants if they decide to leave the rental business (for at least five years). Its origin dates back to the late-70s, when a young landlord named Jerome Nash inherited a building from his mom in Santa Monica. A few years later, he wanted to get out of the landlord business and demolish the building, but due to tenant protection policies, the city of Santa Monica denied him a permit to evict his tenants. He sued the city and won, but it was reversed in the State Supreme Court in 1984. The reversal meant cities could legally force landlords to offer their property for rent, regardless of whether they wanted to go out of business.

Enter State Senator Jim L. Ellis from San Diego. He introduced the Ellis Act to help Nash, and for the first decade after it became law, the Ellis Act was used only a few times across the state. It all changed during the 90s dot-com boom. Landlords realized they could flip their rent-controlled properties into more profitable buildings, e.g. luxury condos or mansions.

From 1994 to 2004, over 2,000 families were forced out of their homes in SF due to the Ellis Act. The problem is that buildings that go “out of business” don't necessarily disappear from the market. Instead, they’re bought by real estate developers looking to raise rent and make a profit. From March 2016 to Feb. 2017, the SF Rent Board received 127 Ellis Act eviction filings with a total of 410 reports for alleged wrongful eviction. In a time when every housing unit counts, Ellis Act evictions are one of the many factors that choke our housing supply and contribute to SF's lack of affordable housing.

To try to prevent the misuse of the Ellis Act, SF passed a policy in 2005 requiring landlords to pay evicted tenants about $4500 in relocation assistance (adjusted annually for inflation). Then in 2015, SF upped the ante, requiring landlords to pay evicted tenants the difference between their current rent and the rent they would pay for a similar apartment for two years. In SF, this could cost as much as $50K per tenant. This law was quickly appealed and overturned. In March 2017, the First District Court of Appeal in SF ruled the ordinance illegal and “a form of ransom” against property owners.

Named after a Democrat and Republican lawmaker (respectively), the 1995 Costa-Hawkins Rental Housing Act was an 11-year effort led by landlords to end extreme forms of rent control across CA. "Vacancy decontrol" is essentially enforced, preventing cities from keeping rental units permanently rent-controlled.

In SF, this means: Housing built after January 1, 1996 are not rent-controlled. Technically, they're rent-stabilized. Landlords can raise rents on tenants living in rent-stabilized units, but they have to file a petition with the SF Rent Board and present their case to a judge, who rules on whether they can raise their rent.

More than two decades later, tenant rights’ activists and landlords are still fighting over Costa-Hawkins. On one hand, rent control helps those living in rent-controlled apartments, especially the elderly, disabled, and low-income households. Between 1995-2012, residents living in rent-controlled apartments in SF saved thousands of dollars a year, totalling $393M annually. On the flip side, during that same time period, rents across SF increased by 7% overall and cost renters $5B.

Today, 70% of SF's housing supply is still rent-controlled. Let's crunch some numbers: We have about 386K homes in SF. Around 138K (36%) of those homes are owned by homeowners, which leaves about 247K units available for rent. Roughly 172K units, or 70% of our housing supply, is rent-stabilized. That leaves about 75K rental units, which isn’t a lot for everyone else.

Rent control also disincentivizes landlords from maintaining their homes. Since their units aren’t renting at market rate, they don’t have to improve their units to attract new tenants. So depending on what kind of apartment you live in, rent control can be a blessing or another reason you're paying ridiculously high rent.